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Two-wheelersAutomobiles: Thematic | December 2013
Chirag Jain (Chirag.Jain@MotilalOswal.com) + 91 22 3982 5418
Jinesh Gandhi (Jinesh@MotilalOswal.com) + 91 22 3982 5416
2December 2013
Automobiles
2013: Scooters re-Activa-ted...
Page No.Executive summary ........................................................................................................ 3-4
Story in charts ................................................................................................................ 5-7
Value migrating to scooters, led by changing customer priorities.......................... 8-12
Japanese players had triggered shift towards motorcycles .................................... 13-17
Resurgence of scooters led by automatic segment ................................................. 18-22
Can share of scooters revert to historical level of ~45%? ....................................... 24-28
Estimate share of scooters at 37% by 2020 .............................................................. 29-31
HMCL, TVSL well seated for scooter ride .................................................................. 32-33
Companies .................................................................................................................. 34-73
Hero MotoCorp (HMCL): Riding on sharply focused, differentiated brands ..... 35-42
Bajaj Auto (BJAUT): Would exports make up for absence in scooters? ............. 43-49
TVS Motor (TVSL): A dark horse ........................................................................... 50-73
Prices as on 13 December 2013
Value migrates from outmoded business designs to new ones that are better able to satisfy customers' most important
priorities. Developing a strategic understanding of how current and prospective customers change through time could
serve as a compass that would point to the best direction for any company seeking to create value growth. Changing
customer priorities trigger the value migration process, creating opportunities for new business designs. Incumbents
frequently ignore or overlook such opportunities, presenting significant openings for newcomers.
In this report, we present the process of value migration in India's two-wheeler industry over the last two decades and
the changing trend for the coming decade.
Two-wheelers
Automobiles: Thematic | 16 December 2013
Investors are advised to refer
through disclosures made at
the end of the Research
Report.
Re-Activa-ted: Value migrating to scootersHMCL, TVSL well seated; BJAUT chooses to stay out
Changing customer preferences are driving value migration from motorcycles to scooters
in India. In 1HFY14, the share of scooters was 23.5%, up from 12% in FY07. In the
economically developed states, the share of scooters is higher at ~34%, and is growing.
Around 51% of the dealers we surveyed expect the scooters share to be over 40% by
2020. We estimate the scooters share at 37% by 2020, implying 20% CAGR in scooter
volumes.
HMCL and TVSL are prepared for the transition, while BJAUT has strategically decided
to stay out to focus on the global motorcycle industry.
Value migrating to scooters, led by changing customer priorities Industries evolve, driven by changing customer priorities, challenging
incumbents and opening opportunities for proactive business design, in turn
resulting in a new industry order.
Lack of proactive business design from Bajaj Auto (BJAUT; incumbent leader in
geared scooters) had allowed Hero Honda (now Hero MotoCorp; HMCL) to
capture a large part of the value outflow from scooters to motorcycles. Geared
scooters became extinct in India by the mid-2000s.
We are witnessing early signs of value outflow from motorcycles in the urban
markets to automatic scooters, with scooters growing at ~23% CAGR (twice the
growth rate for motorcycles) over the last five years.
Resurgence of scooters led by automatic segment Traditional geared scooters dominated till the mid-1990s due to lack of credible
competition. The entry of Japanese players brought reliability, durability and
fuel efficiency to motorcycles, resulting in shift towards motorcycles in the
late-1990s and geared scooters becoming extinct by mid-2000s.
The resurgence of scooters is led by the automatic scooters, offering
convenience, universal appeal and narrowing of gap in mileage vis-à-vis
motorcycles.
With the launch of Honda Activa in the 2000s, acceptance of automatic scooters
amongst men began growing. The share of scooters recovered from ~12% in
FY07 to ~23.5% in 1HFY14 (v/s average of ~45% till the early 2000s).
Can share of scooters revert to historical level of ~45%? Globally, scooters constitute ~55% of the two-wheeler market (ex China and
Africa). Excluding India, the share of scooters is at ~79% (including geared step-
throughs).
In India, scooter penetration in economically developed states has been higher
at ~34% . Six states contribute ~60% of scooter volumes. Penetration of scooters
is increasing in urban centres, while smaller towns are seeing increased
acceptance.
3December 2013
4December 2013
Automobiles
Around 51% of the dealers we surveyed expect the share of scooters to be over
40% by 2020.
Historically, the share of scooters in India was ~45% for over 30 years till 2000.
The experience of global peers and select developed states, and dealer feedback
suggests that the share of scooters might once again increase to 40-45%.
Estimate share of scooters at 37% by 2020 Based on our multi-model analysis, we expect scooter industry volumes to grow
at ~20% CAGR over FY14-20, twice the growth rate for motorcycles. Overall two-
wheeler industry volumes are likely to grow at 12% CAGR during this period.
The share of scooters would increase to 37% by 2020, with annual sales of 10.7m
units (equal to the current market size of the domestic motorcycle industry).
While the share of scooters is likely to increase, we expect the dominance of
motorcycles to continue, driven by increasing penetration in rural markets.
Motorcycles fare better in rural areas, where road infrastructure is relatively
poor, are more suitable for longer distance travel, and offer higher mileage (an
important factor for cost conscious customers).
HMCL, TVSL well-seated Despite its late entry into the segment, HMCL is the second largest scooter
player, helped by its differentiated positioning aimed at the youth. It plans two
new launches in FY15, coupled with 25% capacity expansion to 900,000 units per
year. Buy with a target price of INR2,680 (14x FY16E EPS).
TVSL is getting its act together, with multiple launches in both the scooter and
motorcycle space. Post the recent launch of Jupiter, TVSL has a complete portfolio
of scooter offerings. The upcoming launch of Scooty upgrade would further
strengthen its position. Initiating coverage with Buy and target price of INR85
(9x FY16E standalone EPS)
For now, BJAUT would lose out due to this migration, as it has taken the strategic
position of being 'a global motorcycle specialist'. Buy with a target price of
INR2,255 (14x FY16E EPS).
Financials and Valuations
EPS (INR) EPS Gr. (%) P/E (x) EV/EBITDA(x) RoE (%) Div. yield (%)
FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E
Bajaj Auto 121.4 141.6 161.1 15.4 16.6 13.8 16.1 13.8 12.1 10.5 8.6 7.0 39.9 38.1 36.1 2.6 3.1 3.3
Hero Moto 116.8 161.7 191.5 10.1 38.4 18.5 17.5 12.7 10.7 9.9 8.3 6.9 43.1 48.8 45.2 3.2 3.4 3.7
TVS Motor 5.2 7.5 9.4 35.9 44.4 25.9 10.4 7.2 5.7 6.0 4.5 3.4 18.7 23.2 24.6 2.8 3.7 4.7
Source: MOSL
5December 2013
Automobiles
21
5939 46
30
5160
31
51
31 34
Ind ia Indo nes ia Vietna m Thai lan d
Ge ared scoote rs/ste p-thrus (% of to tal 2W )Automatics (% o f total 2W)Urb anization (%)
19.117.4
10.711.8
16.418.6
22.3
17.3
20-ye ar CAGR 15-year CAGR 10-year CAGR 5-yea r CAGR
Motorcycle s Gr. (%) Au toma tic Scoote rs Gr. (%)
0%
25%
50%
75%
100%
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
1HFY
14
Motorcycles Ge ared Scoote rs Au toma tic Scooters Mo peds
Hero Sp lendo r laun ch Hond a Activa la unch B ajaj exi ts geare d
s cooters
B ajaj exi ts scoote rs
Story in charts
Break-up of Indian two-wheeler market over the last two decades
Break-up of global two-wheeler market (m units) * Urbanization and scooter penetration
Source: Industry, MOSL
Share of scooters over the last four decades Automatic scooters now growing faster than motorcycles
Globally, two-wheeler markets (ex China and Africa) are
skewed towards scooters, especially in Asia
Motorcycles gained share till early 2000s; automatic
scooters driving resurgence of scooters now
Scooter penetration is directly correlated with the level
of development and urbanization
Prior to motorcycle invasion the share of scooters was
~45% till the early 2000s
Source: Industry, MOSL
Automatic scooters have been growing and have outpaced motorcycle growth over the last 10 years
Scoo ters
17.0
55%
Mo torcycle
13.945%
0
15
30
45
60
FY7
3F
Y75
FY7
7F
Y79
FY8
1F
Y83
FY8
5F
Y87
FY8
9F
Y91
FY9
3F
Y95
FY9
7F
Y99
FY0
1F
Y03
FY0
5F
Y07
FY0
9F
Y11
FY1
3
Scoo ter (% of to tal 2Ws)
* Excluding China and Africa Source: Piaggio, Industry, MOSL
6December 2013
Automobiles
28 26
1922
40
32
2226
Metros Tier 1 ci ties Other to wn s Al l (4 state s)
*
FY10 FY13
* Gujarat Maha rash tra MP & Ch atti sgarh
0
9
21 19
35
10
6
<10% 10-20% 20-30% 30-40% 40-50% 50-70% >70%
43 43 4230 26 28
57 57 5870 74 72
FY09 FY10 FY11 FY12 FY13 FY14YTD
Smal l s co oters (< 100cc) Large scoo ters (> 100cc)
4020
58
70
2 10
2008 2013
Female Male (a ge 25+) Yo uth
Story in charts
Scooter share in developed states higher than all-India average
Ratio FY11 FY13 1HFY14 Urban Popln
Popln (%) (m)
Kerala 29.5 42.2 51.2 47.7 33.4
Gujarat 25.9 30.6 33.3 42.6 60.4
Tami l Nadu 17.1 20.7 24.9 48.5 72.1
D e l h i 18.6 29.7 35.3 97.5 16.8
Karnataka 23.8 28.0 31.6 38.6 61.1
Punjab 21.6 28.2 32.7 37.5 27.7
Maharashtra 24.4 27.8 30.6 45.2 112.4
Average of above 23.0 29.6 34.2
Pan-India 17.4 21.3 23.5 31.2 1,210.2
Source: Industry, MOSL
Results of dealer survey on expected share of scooters Scooter contribution rising even outside the metros (%) by 2020
Source: Industry, MOSL
Our two-wheeler volume estimates
m units FY14E FY20E CAGR (%)
Scooters 3.5 10.7 20.3
% of total 24 37
Motorcycle 10.4 17.3 8.9
% of total 71 60
Mopeds 0.7 0.9 5.0
% of total 5 3
Total Industry 14.6 28.9 12.0
Source: MOSL
Break-up of scooter buyers Break-up of scooter sales by capacity
Source: Industry, MOSL
Increasing share of men and young boys in scooter sales...
Scooter contribution rising even in smaller towns
Scooter share in developed states is at ~34%, as against
pan India average of ~23.5%
…reflected in rising share of bigger scooters
Over 50% of dealers expect scooter share to be over
40% by 2020
We expect scooter volumes to grow at ~20% CAGR overFY14-20, 2x the growth in motorcycle volumes
7December 2013
Automobiles
Two-wheelers: Changing landscapeEra 1970s-mid 2000s From 1990s From 2001 From 2000
Product Bajaj Chetak Hero Splendor Hero Passion Pro Honda Activa
Pricing (INR '000) ^ NA 48.74 50 51.25
Performance
- Engine (cc) 145 97.2 97.2 109
- Power (bhp) 6.25 7.8 7.8 8
- Mileage (Kms/ltr) 35-40 60-65 60-65 40-45
- Ground clearance (mm) 145 159 165 153
Positioning Fami ly scooter, with Focus on male user, good ride Family scooter with improved
conservative design Fami ly scoot er, with asthetics & higher mileage
quality & best mileage than geared scooters
Available Options LML NV Bajaj Platina Hero Maestro
Lamby 150 Bajaj Discover TVS Jupiter
Bajaj Priya Hero HF Dawn TVS Wego
Bajaj Cub Hero HF Deluxe Yamaha Ray
Bajaj Super Honda CB Twister Suzuki Access
Honda Dream Yuga Suzuki Swish
Honda Dream Neo Hero Pleasure
Suzuki Hayate TVS Scooty
TVS Star Sport HMSI Dio
TVS Star City HMSI Aviator
Yamaha Crux
Yamaha YBR
Comments Starting trouble, lack of riding Good ride quality on bad roads, Convenience due to Automatic
comfort over long distance best mileage transmission, universal appeal
^ ex-showroom Mumbai
8December 2013
Automobiles
0%
25%
50%
75%
100%
FY74 FY79 FY84 FY89 FY94 FY99 FY04 FY09 1HFY14
Motorcycle Scooter Mop ed
Value migrating to scooters, led by changing customer prioritiesGreater convenience, multi-usage, improved mileage driving value migration
Industries evolve, driven by changing customer priorities, challenging incumbents and
opening opportunities for proactive business design, in turn resulting in a new industry
order.
Lack of proactive business design from Bajaj Auto (BJAUT; incumbent leader in geared
scooters) had allowed Hero Honda (now Hero MotoCorp; HMCL) to capture a large part of
the value outflow from scooters to motorcycles. Geared scooters became virtually extinct
in India by the mid-2000s.
The fact that BJAUT partly recovered by reacting to the changed world indicates that the
incumbent can retain value by having a proactive business design.
We are now witnessing early signs of value outflow from motorcycles in the urban markets
to automatic scooters.
While HMSI has captured a large part of this value migration by being the driver of this
change, HMCL and TVSL are also well positioned. For now, BJAUT would lose out due to
this migration, as it has taken the strategic position of being 'a global motorcycle specialist'.
Value migration in the Indian two-wheeler industryThe Indian two-wheeler industry has evolved over the last four decades, with value
migrating from geared scooters to motorcycles, and now to automatic scooters, driven
by changing customer preferences and availabi lity of new products. We analyze below
various changes in the industry across different sub-segments.
Changing customer priorities drove value outflow from scooters (geared) and mopeds tomotorcycles from the 1990s to the mid-2000s
Source: Company, MOSL
In his book, 'Value Migration: How to Think Several Moves Ahead of the Competition',
Adrian J Slywotzky describes how value migrates from outmoded business models to
business designs that are better able to satisfy customers' priorities. Developing a
strategic understanding of how current and prospective customers change through time
could serve as a compass that would point to the best direction for any company seeking
to create value growth. There are three phases of value migration - value inflow, stability
and value outflow. These phases describe the relative value-creation power of the
business model, based on its ability to satisfy customer priorities better than competitors
and thus, earn superior returns.
Value migration: Is business design apt to cater to changing customer priorities?
9December 2013
Automobiles
1. Geared scooters (Bajaj Chetak, LML NV, Lamby 150, etc)a. Value inflow (Phase-I: 1960s to mid-1980s): The period between the 1960s to
the mid-1980s was dominated by traditional metal-bodied geared scooters
due to relatively lower cost, higher mileage and lower maintenance compared
with the then avai lable motorcycles like Royal Enfield, Yezdi and Rajdoot.
Volumes of geared scooters are estimated to have grown at ~17% CAGR during
the period between the 1970s to the mid-1980s.
b. Stability (Phase-II: mid-1980s to mid-1990s): The period between the mid-
1980s to the mid-1990s saw geared scooters maintaining their dominance,
just before the entry of Japanese players, with relatively superior product
offerings. During this period, scooter volumes grew at a CAGR of ~7.5%, also
aided by emergence of ungeared scooters (Kinetic DX, Bajaj Sunny, etc).
c. Value outflow (Phase-III: mid 1990s to 2007): This phase saw increasing
dominance of four-stroke, fuel efficient, sturdy motorcycles, meeting the
changing priorities of emerging India - liberalization ushered higher economic
growth and urbanization. This resulted in continuous decline in geared
scooters, as consumers shifted to motorcycles and automatic scooters.
Production of Bajaj Chetak (synonym for geared scooters in India) was stopped
in 2005.
Changing consumer priorities driving value migration in the two-wheeler industry
Source: MOSL
"Significant growth in
disposable income and
sharp rise in young
consumers led to higher
demand for better two-
wheelers with good
looks, greater power,
high quality, but with
fuel efficiency. These
were the major drivers of
shift from scooters to
motorcycles." - BJAUT
Annual Report, 1999-2000
10December 2013
Automobiles
4725
934
‐38
13
1123
556
45
1
FY93 FY03
BJAUT HMCL Yamaha KineticLML Enfield TVSL
2. Motorcycles (Hero Splendor/Passion, Bajaj Pulsar, Honda Shine, etc)a. Value inflow (Phase-I: 1990s to mid-2000s): While motorcycles had been
growing at ~20% CAGR during the value inflow stage of geared scooters, growth
gathered momentum after the entry of Japanese players with four-stroke (4S)
technology in 1985. It took almost 10 years for 4S motorcycles to find acceptance
in India. The Indian motorcycle industry grew at ~22% CAGR over FY93-08,
overtaking scooters in FY00. Value migrated towards motorcycles, with
customer priorities being better mileage, superior quality (product and ride)
and aesthetics.
b. Stability (Phase-II: mid-2000s onwards): After strong growth during the 1990s
to the mid-2000s, motorcycle volume growth moderated to ~12% CAGR over
FY08-13. While in urban markets, motorcycles would have to compete with
automatic scooters for new and replacement demand, growth in motorcycle
volumes would be driven by increasing rural penetration.
Geared scooters became extinct by the mid-2000s Domestic two-wheeler market share trend (%)
Source: SIAM, MOSL
Fuel efficiency, suitability
for poor roads key
reasons for customer
preference for
motorcycles
Motorcycles gained at the expense of scooters in 1990s Domestic two-wheeler market share trend (%)
Source: SIAM, MOSL
0
400
800
1,200
FY7
4
FY7
7
FY8
0
FY8
3
FY8
6
FY8
9
FY9
2
FY9
5
FY9
8
FY0
1
FY0
4
FY0
7
0
20
40
60
Volumes ('000 u ni ts) % of 2W indus try
0
4,000
8,000
12,000
FY90
FY92
FY94
FY96
FY98
FY00
FY02
FY04
FY06
FY08
FY10
FY12
20
42
64
86
Volumes ('000 uni ts ) % of 2W in dus try
11December 2013
Automobiles
72.1123.1
186.8
252.0
411.8
1971 1981 1991 2001 2011
Urb an Ro ads
18
20
23
26
28
31
1961 1971 1981 1991 2001 2011
Urba n po pulation (%)
1314
1718 19
1990 1995 2000 2005 2010
Sha re of women e mplo yed in th e non agricul tura lsector (% o f total n onagricu l tural e mployment)
Average PCI In dex
100334
895
1,933
1980-1990 1990-2000 2000-2010 2010-2013
3. Automatic scooters (Honda Activa, Hero Pleasure, TVS Scooty, etc)a. Value inflow (Phase-I: mid 2000s onwards): Automatic scooters (Kinetic DX,
Bajaj Sunny, etc) have been around since the mid-1980s and have grown at
~14% CAGR over FY93-03. However, they gained traction with the launch of
Honda Activa, the first 4S automatic scooter, in 2001. Customer acceptance of
automatic scooters has been increasing, especially in urban markets, driven
by narrowing fuel efficiency gap vis-à-vis motorcycles, improvement in urban
roads and unisex appeal. Automatic scooter volumes grew at ~22% CAGR over
FY08-13.
"Scooters find multiple
uses in urban households
vs. motorcycles, which
are more suited for men"
stated by Mr Anil Dua,
Senior VP (Marketing &
Sales) HMCL in an
interview with ET, dated
Nov. 3, 2013
Automatic scooters are driving the resurgence of scooters Domestic two-wheeler market share trend (%)
Source: SIAM, MOSL
Catalysts for changing customer priorities, leading to value migration to scootersRising per capita income Increasing female worker participation in non-agri sectors
Growing urbanization Increasing road infrastructure in urban areas ('000 km)
Source: World Bank, MORTH, Industry, MOSL
0
1,200
2,400
3,600
FY90
FY92
FY94
FY96
FY98
FY00
FY02
FY04
FY06
FY08
FY10
FY12
5
10
15
20
25
Volu mes ('000 un i ts) % of 2W ind ustry
24.9 17.9
33.8 42.9
3.118.9
5.4
2.622.512.8
10.3 4.9
FY03 FY13
BJAUT HMCL HMSI Yamah a TVSL Others
12December 2013
Automobiles
Value migration poses threat, but also opens up opportunities Value migration is relocation of underlying value, rather than disappearing of
value, to products/business designs that aptly address changed priorities.
The changing dynamics pose challenges for incumbents, but also open up large
opportunities. Though changing customer priorities undermine the incumbents'
position of strength, they do not have to necessarily lose out. By having a
responsive business design, they can sustain their position and create a new value
proposition that addresses new priorities.
In context of the Indian two-wheeler industry, we have already witnessed value
migration from geared scooters to motorcycles. Lack of proactive business design
from BJAUT (incumbent leader in geared scooters) allowed HMCL to capture a
large part of the value migration to motorcycles.
However, the fact that BJAUT recovered part of the lost ground by reacting to the
changed world indicates that the incumbent can retain value by having a proactive
business design.
In the current context, we are witnessing early signs of value outflow from
motorcycles to automatic scooters in the urban markets, driven by higher
convenience and unisex design.
While HMSI has so far captured a large part of this value migration by being the
driver of this change, HMCL and TVSL are also well positioned. For now, BJAUT
would lose out due to this migration, as it taken has taken the strategic position of
being 'a global motorcycle specialist'.
13December 2013
Automobiles
Japanese players had triggered shift towards motorcyclesFuel efficiency, reliability and suitability for poor roads were key drivers
Traditional geared scooters dominated till the mid-1990s due to their lower cost, higher
mileage, and lower maintenance compared to the then locally available motorcycles.
The entry of Japanese players brought reliability, durability and fuel efficiency to
motorcycles.
The shift from traditional geared scooters gathered pace in the 1990s, as higher income
levels and economic development led to increase in demand for better two-wheelers.
Sharp rise in fuel prices (in the late 1990s) led to a sudden and sharp rise in the share of
motorcycles due to their better mileage (scooter sales declined by 30-40% annually in
the late 1990s v/s annual decline of 10-15% earlier). By mid-2000s, geared scooters were
extinct.
Why scooters had dominated pre-1990s Lack of reliable and fuel efficient motorcycle
Motorcycles, by nature of their design, are generally more rugged and sturdy than
scooters. They have better ground clearance, strong suspensions and larger
wheelbases.
However, pre-1980s, available motorcycle brands lacked reliability and fuel efficiency.
There were only three serious players in the Indian motorcycle market - Bullet, Rajdoot
and Ideal Jawa (Yezdi). Rajdoot was popular in rural areas because of its sturdy
suspension, while Bullet and Jawa were popular in the urban markets for their strong
performance.
While the products were popular, due to issues with respect to mechanical reliability
and fuel efficiency, majority of the customers preferred the then available traditional
geared scooters.
Reliability and low cost helped scooters, especially Bajaj Chetak
Though scooters were an imperfect solution, they offered better functionality than
motorcycles. They were preferred for their functionality of motorized mobility,
affordable pricing, reliability and higher mileage. Bajaj Chetak had captured a major
market share and became a must have for every middle-class Indian. Bajaj Chetak
was synonymous with scooters and demand was so strong that it had a waiting period
of up to 10 years.
"Yezdi had serious
mechanical issues,
especially starting
trouble. One had to
pump about 20 times to
get that machine started.
It stood no chance against
the peppy, new
generation Japanese
bikes." - West-based
HMCL dealer
14December 2013
Automobiles
BJAUT's iconic 'Hamara
Bajaj' advertisement
(click here for video)
captures the joy ride of a
quintessential Indian
middle class family to its
finest details,
immediately connecting
with the consumers
Lamby 150 advertisement, positioning it as an ideal family vehicle LML Vespa advertisement, highlighting its mi leage
Source: Company, MOSL
Bajaj Auto advertisement highlighting sturdiness and reliability of its scooter
Source: Company, MOSL
15December 2013
Automobiles
Entry of Japanese brought much-needed reliability and fuel efficiency
The 1980's saw a sea change in the Indian two-wheeler market, with the entry of
several Japanese players through joint ventures with Indian partners. They introduced
several 100cc motorcycles with state-of-the-art technology; these were far more fuel
efficient, reliable and easy to ride.
Moreover, Hero Honda (now Hero MotoCorp; HMCL) introduced four-stroke
technology, which is superior to the two-stroke technology that Yamaha, Suzuki and
Kawasaki (through Bajaj) had introduced, in terms of fuel efficiency and reliabi lity.
Shift from geared scooters to motorcycles started in 1990sFactors that drove the shift:
Motorcycles generally more suitable for bad roads: Motorcycles performed well
on the relatively poor village roads, with their higher ground clearance, stronger
suspension and larger wheelbase.
Better technology with more reliable and fuel efficient engines: Post the entry of
Japanese players and introduction of four-stroke technology by Hero Honda,
motorcycles became more fuel efficient and reliable.
Goods looks and aesthetics were a bonus.
"Japanese motorcycles
with better ground
clearance, stronger
suspension and larger
wheelbase, performed
well on village roads.
They were more fuel
efficient than traditional
geared scooters due to
their four-stroke
technology. The good
looks and aesthetics
were an added bonus." -
North-based HMCL dealer
Hero Honda advertisements in the 90s, highlighting fuel efficiency, style and power
Sharp increase in fuel prices accelerated shift in late 1990sApart from motorcycles being better in terms of looks, performance, reliability and
fuel efficiency, the following factors accelerated the shift away from traditional geared
scooters:
Oil crisis in the late 1990s led to a sharp increase in fuel prices. Motorcycles being
more fuel efficient than traditional geared scooters, their sales increased sharply.
With multiple motorcycle launches, the price difference between motorcycles
and geared scooters narrowed. This encouraged motorcycle purchases.
Sharp growth in the population of young (18-25 years old) consumers coupled
with significant growth in disposable incomes led to a quantum jump in the
demand for better two-wheelers - vehicles with good looks, greater power and
higher quality, but with fuel economy as well.
Source: Company, MOSL
16December 2013
Automobiles
Hero Honda advertisement, highlighting running expensesat 10paise/km due to four-stroke technology from world Yamaha RX100 (two-stroke) advertisement, highlightingleader, Honda better power, faster pick-up and speed as the key features
Source: Company, MOSL
Trend favoring motorcycles strengthened in early 2000s; Bajaj Auto exited geared scooters inFY06, ungeared scooters in FY11
"Traditional scooters
stood for old family
values and the 'we' factor
- remember the Humara
Bajaj campaign?
Motorcycles are far more
individualistic and are an
image product." - South-
based HMCL dealer
Source: SIAM, MOSL
0%
25%
50%
75%
100%
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
1HFY
14
Moto rcycles Geared Scoo ters Automa tic Scoote rs Moped s
Hero Sp lendo r
lau nch
Hond a Activa
laun ch
Baja j exi ts
gea red s co oters
B ajaj exi ts
s cooters
17December 2013
Automobiles
0
15
30
45
60
FY7
3
FY7
5
FY7
7
FY7
9
FY8
1
FY8
3
FY8
5
FY8
7
FY8
9
FY9
1
FY9
3
FY9
5
FY9
7
FY9
9
FY0
1
FY0
3
FY0
5
FY0
7
FY0
9
FY1
1
FY1
3
S co oter (% of total 2Ws )
Prior to moto rcycle invas ion, average s co oters
s hare wa s ~45% ti l l early 2000s
Share of scooters recovering post FY07
"Depending upon models
and their characteristics,
motorcycles have swept
rural, semi-urban and
urban India in a way that
would have been
inconceivable even a few
years ago." - BJAUT
Annual Report, 1999-2000
Source: SIAM, Company, MOSL
What were the key reasons for the shift from scooters to motorcycles inthe 1990s?The biggest factor for the shift was higher mileage associated with four-stroke
motorcycles. In those days, scooters used two-stroke technology. They delivered
35-40kmpl, while Hero Honda's four-stroke 100cc motorcycles delivered 60kmpl. In
the late 90s, fuel prices rose sharply. With 60kmpl fuel efficiency, motorcycles
became very popular and the share of four-stroke motorcycles increased
tremendously over 1997-2001.
Motorcycles were also more comfortable due to their larger wheels and longer
wheelbase. With the economy opening up in the early 90s, there was an increase in
economic activity, and consequently, traveling needs. Motorcycles offered better
mileage and convenience than scooters.
Though motorcycles were more expensive (INR30k v/s INR20k for scooters),
consumer financing was catching up rapidly. Citibank was very aggressive in two-
wheeler financing then. This coupled with general increase in income levels
supported motorcycle demand.
Excerpts from dealer interaction
Mr Ajay Kumar Patni,
Owner of Arun Automobiles,
BJAUT dealer since 1964
18December 2013
Automobiles
42 43
43
41 38
35 33
26
16 13
7 5 4 3 1
9 8 9 9 9 9 8
10
11
10
11 12
12
11 11 15 16 16 18 19 21 24
‐
13
26
39
52
FY9
3
FY9
4
FY9
5
FY9
6
FY9
7
FY9
8
FY9
9
FY0
0
FY0
1
FY0
2
FY0
3
FY0
4
FY0
5
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
1HF
Y14
Gea red Sco oters Unge ared Scooters
19.117.4
10.7 11.8
18.6
22.3
16.4 17.3
20‐yea r CAGR 15‐year CAGR 10‐year CAGR 5‐yea r CAGR
Motorcycles Gr. (%) Automa tic Scoote rs Gr. (%)
‐
20
40
60
80
100
FY9
3
FY9
6
FY9
9
FY0
2
FY0
5
FY0
8
FY1
1
1HF
Y14
Motorcycle s Scoote rs
Resurgence of scooters led by automatic segmentConvenience, universal appeal coupled with economic development driving demand
While the sale of traditional geared scooters declined, the share of automatic scooters
continued to increase, driven largely by higher demand from working women, college
students (female) and senior citizens.
With the launch of Honda Activa in the 2000s, automatic scooters started gaining acceptance
amongst men as well, due to attributes such as comfort, convenience and universal usage.
Automatic scooters (particularly those launched by Honda) were far ahead of traditional
geared scooters in terms of their performance, reliability and fuel efficiency.
Urban markets could see further increase in the share of scooters, driven by (a) new
demand from a wider target audience, and (b) replacement demand from motorcycle
users.
Automatic scooters address shortcomings of geared scootersWhile traditional geared scooters died down, the growth momentum in ungeared
(automatic transmission) scooters continued. Over the last two decades, automatic
scooters have grown at 16% CAGR against ~7% CAGR for the overall scooter segment.
Automatic scooters offer several advantages over traditional scooters. Attributes such
as convenience (self-start, no need to change gears), contemporary looks, and
powerful engines are making them popular amongst customers across age categories
and gender.
Share of scooters has declined over the last two decades …but automatic scooters have been driving resurgencedue to decline in geared scooters (% of 2Ws)… over the last 10 years
Source: SIAM, MOSL
Share of automatic scooters has been rising, driven by several launches (% of total 2Ws)
Increasing focus on automaticscooters
Company Brand Year
TVS Scooty 1994
Honda Activa 2000
Hero Pleasure 2005
Suzuki Access 2007
Honda Aviator 2009
Mahindra Rodeo 2009
Mahindra Flyte 2009
TVS Wego 2010
Mahindra Kine 2010
Yamaha Ray 2012
Suzuki Swish 2012
Hero Maestro 2012
Honda Dio 2012
Piaggio Vesp a 2012
Mahindra Duro 2012
TVS Jupiter 2013
Source: SIAM, Industry, MOSL
19December 2013
Automobiles
447560
759 783 752
521
43
3026 28
43 42
FY09 FY10 FY11 FY12 FY13 FY14YTD
Smal l s cooters ('000 un i ts) % of to tal s co oters
Initially, urban women and students drove demand for automatic scooters Ungeared scooters, which were predominantly plastic bodied (lighter weight and
smaller size), with lower capacity engines (largely sub-100cc), were popular among
females. Usage by males was limited, considering the tiny/feminine looks of the
plastic bodied scooters.
Companies promoted automatic scooters through high decibel celebrity
endorsements, focusing on women empowerment.
With greater economic development, increasing women participation in the
workforce, demand from female customers increased at a healthy rate till FY12.
However, post FY12, there is a distinct trend towards large/unisex scooters.
Small scooters were popular among females
"Ungeared scooters were
initially used by urban
women and college
students, who prefer
automatic transmission,
self-start, light weight
and easy
maneuverability." -
South-based TVSL dealer
"Scooters are perceived
to be safer than
motorcycles. Hence,
parents generally buy
scooters for their school/
college going children in
the age bracket of 18-22
years." - South-based
HMSI dealer
Source: Industry, MOSL
Hero Pleasure advertising campaign focusing on women empowerment
Source: Company, MOSL
Hero Pleasure
advertisement, 'Why
should boys have all the
fun?', featuring
Bollywood actress
Priyanka Chopra (Click
here to see video)
20December 2013
Automobiles
586 7341,041
1,8062,090
1,361
57 57 58
727470
FY09 FY10 FY11 FY12 FY13 FY14YTD
Large scoo ters ('000 uni ts ) % of total s cooters
Acceptance amongst men has also increasedGrowth for automatic scooters has accelerated over the last four years, with 26%
volume CAGR. Large scooters (>100cc) have been growing faster at ~31% CAGR. This is
largely driven by increasing acceptance of automatic scooters among men. Among
the reasons for the growing popularity of automatic scooters are:
Significant reduction in performance and fuel efficiency gap with motorcycles:
With advancement in technology, the performance of current generation scooters
has improved significantly and is near motorcycle levels. The fuel efficiency gap
v/s motorcycles has reduced - 40-45kmpl v/s 60-65kmpl for motorcycles (35-40kmpl
for geared scooters).
Universal appeal: Being automatic transmission vehicles with self-start option
and consequent ease in driving, scooters can be used by both males and females,
young and old.
Convenience and comfort: Automatic transmission scooters offer a lot of comfort
and convenience, particularly in urban traffic conditions.
Perfect primary family vehicle: High fuel prices and traffic congestion make
scooters a convenient mode of transport for daily commutes, while cars are used
for occasional drives.
Comparison of competing two-wheelers
Parameters Honda Hero Hero Bajaj
Activa Splendor Pro Passion Pro Chetak 2S
Price (INR '000) ^ 51.25 48.74 50 NA
Engine (cc) 109 97 97 145
Power (bhp) 8.00 7.80 7.80 6.25
Weight (Kgs) 111 109 116 103
Mileage (Kms/Ltr) * 60 90 84
Mileage on-road (Kms/Ltr) 40-45 60-65 60-65 35-40
Wheelbase (mm) 1,238 1,230 1,235 1,230
Seat height (mm) 765 785 795 840
Ground clearance (mm) 153 159 165 145
^ Ex-showroom Mumbai, * Manufacturer's claim Source: Company, MOSL
Large scooters gaining wider acceptance, taking away share from small scooters
Bollywood actress
Anushka Sharma in TVS
Scooty ad focusing on
women empowerment
Source: SIAM, Industry, MOSL
"The scooter is turning
out to be the perfect
'second car' in the family.
High fuel prices and
traffic congestion make
scooters a convenient
mode of transport for
daily commutes, while
cars are more suitable for
occasional weekend
drives." - Noida-based
HMSI dealer
(click here to see video)
Source: Company, MOSL
21December 2013
Automobiles
Scooters becoming popular amongst youth as well Our channel interactions indicate that scooters are gaining acceptance amongst
the youth. Brands such as Honda Dio and Yamaha Ray-Z are being bought by young/
college going boys.
However, they are not yet attractive relative to motorcycles, which sti ll constitute
a big chunk of the market.
Attractiveness amongst youth would be the key inflection point.
Sensing this, two-wheeler players have launched several male-specific products
- Hero Maestro, Honda Aviator, Yamaha Ray-Z, TVS Jupiter.
With several recent launches targeting the youth (young boys in the 18-25 years
bracket), acceptance amongst youth is also increasing at a rapid pace, especially as
the 'network' effect sets in. HMCL is focusing on positioning its Maestro scooters as a
'cool' product for young men. The product is endorsed by Bollywood star and youth
icon, Ranbir Kapoor.
Mr Anil Dua, Senior VP,
Marketing & Sales, HMCL
indicated that with
Maestro scooters, which
are targeted towards the
youth, urban consumers
are now more
comfortable with
scooters. Earlier, while
the women customers
were largely from cities,
male customers were
largely from smaller
towns.
Hero Maestro online advertisement focused on young men TVS Jupiter advertisement positioning it as 'for men'
Source: Company, MOSL
HMCL is focusing on
positioning its Maestro
scooters as a 'cool'
product for young men.
The product is endorsed
by Bollywood star and
youth icon, Ranbir Kapoor
(click here to see the
video)
Hero Maestro advertisement featuring bollywood star Ranbir Kapoor
Source: Company, MOSL
22December 2013
Automobiles
4020
58
70
2 10
2008 2013
Female Male (a ge 25+) Yo uth
43 43 4230 26 28
57 57 5870 74 72
FY09 FY10 FY11 FY12 FY13 FY14YTD
Smal l s co oters Large s co oters
Share of men and young boys rising over the last five years… …reflected in rising share of bigger scooters
Source: Industry, MOSL
Scooter share of incremental 2W industry volumes (%) Trend in volumes in best motorcycle and scooter brand ('000)
57
1525 30
9499
FY09 FY10 FY11 FY12 FY13 1HFY14
1,9992,309 2,337
1,282
584 6551,011
1,209885
2,755
FY10 FY11 FY12 FY13 1HFY14
Sp lendo r Activa
Source: Industry, MOSL
23December 2013
Automobiles
Excerpts from dealer interactionHow has been the trend in scooter sales in the Baroda market over thelast five years?More and more customers are preferring scooters. In Baroda, the share of scooters
in total two-wheeler sales has increased from 15% to 30% over the last five years.
Why are scooters increasingly becoming the preferred choice forpersonal transportation?Scooters are a convenient mode of transport for city driving due to automatic
transmission, self-start and light weight (easy maneuverability). With
advancement in technology, the mileage gap between scooters and motorcycles
has also reduced significantly.
What is the typical customer profile for scooters?Students in the age bracket of 18-22 years, working women, housewives, small
traders and business men, aged people (over 40 years) are the key customer
categories for scooters.
Scooters are no longer only a female targeted product. Earlier products were
largely plastic bodied and small, and hence, perceived as female only products.
Today, there are a lot of options available in the scooter segment, with high power,
larger size and good looks - Activa, Maestro, etc.
In fact, now the share of male customers (self-employed, small traders, service
category) is much higher than female customers, though overall number of female
customers has also increased over the years.
Will scooters overtake motorcycles over the next 5-7 years?Scooters will continue to grow ahead of motorcycles. However, motorcycles will
remain popular up-country and for longer distance travel (until infrastructure
improves significantly). Motorcycles have their own advantages in rural areas in
terms of being more comfortable on relatively poor quality roads and for long
distance travel (larger wheelbase, higher ground clearance, better shock
absorbers) and higher mileage (for cost conscious rural customers).
Mr Jayant Shah,
Owner of Kumar Motors,
HMCL dealer since inception
(1984)
24December 2013
Automobiles
Scoote rs
17.0
55%
Moto rcycle
13.9
45%
Can share of scooters revert to historical level of ~45%?Global (and select local) experience suggests acceleration in scooter share
Globally, scooters constitute ~55% of the two-wheeler market (ex China and Africa).
Excluding India, the share of scooters is at ~79% (including geared step-throughs).
In India, scooter penetration in economically developed states has been higher. Six states
contribute ~60% of scooter volumes. Penetration of scooters is increasing in urban centres,
while smaller towns are seeing increased acceptance.
~51% of the dealers we surveyed expect the share of scooters to be over 40% by 2020.
Historically, the share of scooters in India was ~45% for over 30 years ti ll 2000. The
experience of global peers and select developed states, and dealer feedback suggests
that the share of scooters might once again increase to 40-45%.
Large global markets skewed towards scooters Scooters constitute ~55% of the global two-wheeler market (ex China and Africa).
Excluding India, the share of scooters is ~79%.
Globally, large evolved two-wheeler markets are largely scooter/step-through
markets, with share as high as 100%.
Asia is the largest two-wheeler market, accounting for over 85% of the global
two-wheeler market (ex China and Africa). Market dynamics in India are similar
to other Asian countries, though India is behind its Asian peers in terms of
economic evolution. The evolution of the two-wheeler market in India is likely to
be on similar lines as in other Asian countries.
Indonesia, the third-largest two-wheeler market in the world after China and
India, with annual sales of 7m units, is primarily a scooter/step-through market.
A similar shift is likely in India, but not as fast and steep, considering the difference
in fuel efficiency, aesthetics and road infrastructure (especially in rural areas).
Globally, two-wheeler markets are skewed towards scooters, especially in Asia (m units) *
* Excluding China and Africa Source: Piaggio, MOSL
2.9
12.5
0.040.8
0.8
10.1
1.3
0.5
1.6
0.5
India ASEAN North
Ame rica
South
America
Euro pe
Scoote rs Motorcycle
"The latent demand for
scooter was always there
because of its utility
value; it was a question
of bringing the right
product." HMSI Ex-
Operating Head (Sales
and Marketing) NK Rattan
said in an interview with
Economic Times dated
November 21, 2010.
25December 2013
Automobiles
2.13.17.3
13.8
6
21
30 29
Ind
ia
Indo
nes
ia
Vie
tna
m
Thai
lan
d
Market Size (m u nits) Penetra tion (% of popu lation)
21
5939 46
30
5160
31
51
3134
Ind ia Indo nes ia Vietna m Thai lan d
Ge ared scoote rs/ste p-thrus (% of to tal 2W )Automatics (% o f total 2W)Urb anization (%)
Scooters dominate in Indonesia; will India follow? Market skewed towards step-throughs: Just as 100cc motorcycles dominate the
Indian two-wheeler market, step-throughs dominate the Indonesian market.
Step-throughs account for ~86% of the two-wheelers sold in Indonesia, the rest
being motorcycles.
Practicality, universal appeal of step-throughs make them popular: Step-throughs
are popular due to their practicality (in crowded Indonesian streets), higher
mileage (than motorcycles available in Indonesia) and universal appeal (female
labor force participation high at 50% v/s 29% in India).
Step-through market shifted towards automatic transmission due to convenience:
Since 2004, with the launch of automatic transmission step-throughs (locally
called skubeks), the share of geared step-throughs (locally called bebeks) in
overall two-wheeler sales declined significantly in favor of skubeks due to their
convenience in the face of traffic congestion, supported by similar pricing, looks
and fuel efficiency.
Share of automatic transmission step-throughs increased significantly over 7-8 years
Two-wheeler penetration high in ASEAN region, especially scooter penetration, due to higher development and urbanization
Source: Industry, MOSL
Source: Industry, MOSL
95
39
5
61
2004 2012
Bebe ks (ge ared) Skubeks (ungeared )
26December 2013
Automobiles
Local experience of select developed states indicates higher share of scooters The share of automatic scooters has been rising in the overall two-wheeler
industry across states over the last few years.
Anecdotal evidence suggests that states with higher economic development and
open culture have higher scooter sales penetration.
Our analysis of last few years' town-wise two-wheeler sales in Gujarat, Madhya
Pradesh, Maharashtra and Chattisgarh (four states contributing 27% of pan-India
market) indicates that scooter penetration is increasing even in smaller towns.
Top-6 states (four in the South and two in the West) contribute over 60% of scooter
demand. All these states are relatively more developed; hence, the higher scooter
penetration.
Share of ungeared scooters has increased across markets
Scooter share (% of total 2W) PCI Urbanization 2W share
FY11 FY13 1HFY14 (INR '000) (%) (%)
Kerala 29 42 51 84 47.7 4.9
Chandigarh 18 22 48 135 97.3 0.6
D e l h i 19 30 35 176 97.5 2.2
Gujarat 26 31 33 83 42.6 7.6
Punjab 22 28 33 78 37.5 3.6
Karnataka 24 28 32 69 38.6 6.5
Maharashtra 24 28 31 92 45.2 11.4
TN 17 21 25 84 48.5 11.4
India Average 17 21 23 69 31.0 100.0
Haryana 15 19 22 109 24.3 3.0
AP 15 19 20 72 33.5 8.2
Chattisgarh 17 17 18 47 23.2 2.3
Orissa 16 18 18 46 16.7 2.6
W B 9 13 14 56 31.9 3.9
MP 14 14 14 35 27.6 5.6
Rajasthan 13 12 13 47 24.9 6.5
UP 9 10 11 29 22.3 10.7
Source: SIAM, MOSPI, RBI, Industry
Honda Blade (geared step-through; bebek) Honda Vario (automatic transmission; skubek)
Source: Company, MOSL
In 1HFY14, scooter sales
in Kerala and Chandigarh
were similar to
motorcycle sales
27December 2013
Automobiles
2318
106
3730
22 20
50
40 39 37
Tie r I (Metro Cities ) Ti er II Tier III Rural
2008 2013 2020
28 2619 22
40
32
2226
Metros Tier 1 ci ties Other towns Al l (4 s tates )
*
FY10 FY13
* Guja rat, Mahara shtra , MP & Chattis garhKa rnataka,
9
An dhra
Prad esh, 7 Kerala, 10
Gu jarat, 11
Tami l
Nadu , 11
Mah a‐
ras htra, 15
Others , 37
What proportion of the total two-wheeler industry sales in your respective market comes/would come from the scooter segment?
Scooter sales contribution rising even in smaller towns (%) FY13: State-wise scooter sales contribution (%)
Source: Industry, MOSL
Source: MOSL
Share of scooters expected to rise across categories of towns (%)
Source: MOSL
Takeaways from dealer surveyOver 50% of dealers expect the share of scooters to increase to over 40% by 2020 - increasing trend seen across OEs and markets
3540
95 4
711
23
30
149
13
0
9
21 19
35
106
<10
%
10‐
20‐
30‐
40‐
>50
%
<10
%
10‐
20‐
30‐
40‐
>50
%
<10
%
10‐
20‐
30‐
40‐
50‐
>70
%
2008 2013 2020
28December 2013
Automobiles
Within male customers, do you believe that scooters are Are young boys (age 18-22 years) also getting attracted andcannibalizing motorcycle sales? buying scooters largely for their own usage?
Source: MOSL
OEM-wise dealer participant share (%) Market classification of participant dealers (%)
Source: MOSL
No t yet,
47%Yes , 53%
26
40
34
Hero Moto HMSI TVS MotorTie r II , 41
T i er I II , 24
Rura l , 15 T ier I
(Metro
Ci ti es), 21
Ca nnabal i z
i ng, 75%
Incre‐
menta l
sa l es , 25%
29December 2013
Automobiles
Estimate share of scooters at 37% by 2020However, dominance of motorcycles to continue
Based on our multi-model analysis, we expect scooter industry volumes to grow at ~20%
CAGR over FY14-20, twice the growth rate for motorcycles. Overall two-wheeler industry
volumes are likely to grow at 12% CAGR during this period.
The share of scooters would increase to 37% by 2020, with annual sales of 10.7m units
(equal to the current market size of the domestic motorcycle industry).
While the share of scooters is likely to increase, we expect the dominance of motorcycles
to continue, driven by increasing penetration in rural markets. Motorcycles fare better in
rural areas, where road infrastructure is relatively poor, are more suitable for longer
distance travel, and offer higher mileage (an important factor for cost conscious customers).
Estimate share of scooters at 37% by 2020, volume CAGR at ~20% Based on our multi-model analysis, we expect scooter industry volumes to grow
at ~20% CAGR over FY14-20, twice the growth rate for motorcycles. Overall two-
wheeler industry volumes are likely to grow at 12% CAGR during this period.
The share of scooters would increase to 37% by 2020, with annual sales of 10.7m
units (equal to the current market size of the domestic motorcycle industry).
We discuss the two methodologies used to estimate potential scooter volume
growth over the next six years, based on (A) expected penetration in urban and
rural markets, and (B) experiential evidence in relatively developed states.
Scooter volumes likely to grow at twice the growth rate for motorcycles
m units FY14E FY20E CAGR (%)
Scooters 3.5 10.7 20.3
% of total 24 37
Motorcycle 10.4 17.3 8.9
% of total 71 60
Mopeds 0.7 0.9 5.0
% of total 5 3
Total Industry 14.6 28.9 12.0
Source: MOSL
(A) Estimating two-wheeler penetration in urban and rural markets, and further
estimating replacement and incremental demand for scooters within the urban-
rural mix.
Expect scooter share to increase to ~40% by FY20, implying 20% CAGR in scooter volumesUrban Rural Total % of total
FY14E 3.3 0.2 3.5 24.1
FY20E 8.7 2.9 11.6 40.0
CAGR 17.5 54.4 22.0
Key Assumptions for scooters
Replacement demand (% of replacement demand 75 25 26
New demand (% of new demand) 50 15 36
Source: MOSL
Mr YS Guleria, VP
(Marketing & Sales),
HMSI indicated that
scooter sales are strongly
correlated to economic
development and
education. "First it was
Chandigarh - a hub of
education in the north.
And then in South India,
Kerala - India's most
literate state - became
the first state where
scooters outsold bikes.
Our data show that
Gujarat is now emerging
as a major hub where
scooters are narrowing
the gap with motorcycles
pretty fast,".
30December 2013
Automobiles
(B) Scooter demand following similar trend on pan-India basis, as currently
experienced in relatively developed and urbanized states.
Scooter share in developed states at ~34%, as against pan-India average of 23.5%Ratio FY11 FY13 1HFY14 Urban Popln (%) Popln (m)
Kerala 29.5 42.2 51.2 47.7 33.4
Gujarat 25.9 30.6 33.3 42.6 60.4
Tamil Nadu 17.1 20.7 24.9 48.5 72.1
D e l h i 18.6 29.7 35.3 97.5 16.8
Karnataka 23.8 28.0 31.6 38.6 61.1
Punjab 21.6 28.2 32.7 37.5 27.7
Maharashtra 24.4 27.8 30.6 45.2 112.4
Average of above 23.0 29.6 34.2
Pan-India 17.4 21.3 23.5 31.2 1,210.2
Source: Industry, MOSL
Share of automatic transmission step-throughs increased significantly over 7-8 years
We note that it took just
three years for these
developed states to
improve scooter share
from 23% (current pan-
India average) to ~34%
(estimated pan-India
average by 2020)
Source: UN, MOSL
Based on experience of developed states, scooter volumes can grow at ~19% CAGR to ~34% oftwo-wheeler industry
2W Demand Motocycle Scooter % of total
FY14E 14.6 11.1 3.5 24.1
FY20E 28.9 19.0 9.9 34.2
CAGR 12.0 9.4 18.7
Source: MOSL
Motorcycle volumes to grow at ~9%, driven by rural markets While the share of scooters is likely to increase, we expect the dominance of
motorcycles to continue, driven by increasing penetration in rural markets.
In rural markets, motorcycles will continue to be preferred due to their suitability
for:
higher travelling distances (average of 40-50km/day v/s 10-15km/day in urban
markets)
relatively poor road infrastructure
largely male user category (relatively less open culture)
relatively cost conscious customers (motorcycles deliver higher weight-to-
fuel efficiency and maintenance cost is perceived to be lower).
Urbanizatio n (%)
27.7 29.230.9 32.8
34.8
2000 2005 2010 2015 2020
31December 2013
Automobiles
Estimating industry's volume to grow 12.4% CAGRDomestic FY14E FY20E CAGR (%)
Scooters 3,500,000 10,518,574 20.1
Motorcycles 10,400,102 17,361,371 8.9
Mopeds 700,000 938,067 5.0
Dom. industry vols (A) 14,600,102 28,818,012 12.0
Exports FY14 FY20 CAGR (%)
Scooters 84,146 166,089 12.0
Motorcycles 1,927,918 4,459,392 15.0
Mopeds 5,302 8,414 8.0
Export industry vols (B) 2,017,366 4,633,895 14.9
Total industry vols (A+B) 16,617,468 33,451,907 12.4
Source: MOSL
Would profitability for scooters be very different from motorcycles?Based on our interaction with the industry, gross margins on scooters are slightly
lower than motorcycle due to a) expensive automatic transmission and b) higher
body components. However, EBITDA margins would be largely driven by the
operating leverage and economies of scale, and is expected to be similar as
motorcycle on comparable volumes. When we compare EBITDA margins of HMSI
(large scooter contribution) with Hero MotoCorp (large motorcycle contribution),
EBITDA margins for FY13 for HMSI were lower by ~70bp vis-à-vis HMCL (at 45%
volumes of HMCL).
32December 2013
Automobiles
HMCL, TVSL well seated for scooter rideBJAUT, however, decides to stay out to be a global motorcycle specialist
While the increasing share of scooters could have a disruptive impact on listed players'
domestic operations, a proactive business model would help to benefit from changing
industry dynamics.
By being the driver of the shift towards scooters, HMSI would continue to benefit. HMCL
and TVSL are also well positioned for this migration.
Despite its late entry in the segment, HMCL has become the second-largest scooter
player, helped by its differentiated positioning aimed at the youth. It plans two new
launches in FY15 coupled with 25% capacity expansion to 900k/year.
TVSL is getting its act together with multiple launches in both the scooter and motorcycle
space. With the recent launch of Jupiter, TVSL has a complete portfolio of scooter offerings.
The upcoming launch of Scooty upgrade would further strengthen its position in the
female scooter space.
For now, BJAUT would lose out on this migration, as it has taken the strategic position of
being a 'global motorcycle specialist'.
HMCL: Differentiated positioning in scooters, with focused marketing Though HMCL was a late entrant in the scooter space (entered in 2006), it has
differentiated its positioning by targeting the youth as against competitors' focus
on the family.
Further, HMCL is preparing to strengthen its position by launching two scooters in
FY15, along with expansion of its scooter capacity.
We believe HMCL can outgrow the scooter market, leveraging its differentiated
positioning based on customer understanding, wide reach and focused marketing.
This coupled with added volumes from export markets and potential levers for
margin expansion makes HMCL our top two-wheeler pick. Buy with a target price
of INR2,680 (14x FY16E EPS).
TVSL: Dark horse with ingredients in place for sharp EPS growth TVSL is getting its act together by having relevant products in place in both the
scooter and the motorcycle segments.
A moderate success of the Jupiter and the upcoming executive segment motorcycle
launch would drive significant operating leverage, margins and strong EPS growth.
Further, any clarity on Indonesian operations (success of recent launch or closure
of operations) could also act as a re-rating trigger for the stock.
We believe FY15 would be critical year for TVSL due to (a) full benefit of launches
in 2HFY14, and (b) multiple launches in FY15.
It is a dark horse, with potential to deliver annualized returns of 25-30% CAGR
over the next 2-3 years. We initiate coverage with a Buy rating and a target price of
INR85 (9x FY16E standalone EPS).
33December 2013
Automobiles
FY14-YTDSuzuk i ,
0.67
Oth ers,
2.96
TVSL, 5.72
Yamaha,
3.04
BJAUT,
21.00
HMSI, 15.22
HMCL,
51.40
FY14-YTDOthers , 2.7
Yama ha,
4.8
Su zu ki , 9.1
HMSI, 51.6
HMCL, 19.4
TVSL, 12.4
"Great brands are built on
the foundation of
sacrifices. Making more
scooters doesn't mean
making more money. We
are a specialist
motorcycle company. We
won't venture out of that
easi ly."
- Mr Rajiv Bajaj,
Managing Director, BJAUT
BJAUT: Would exports make up for absence in scooters? BJAUT would lose out in the domestic market, as it has taken a strategic decision
to focus on being a 'global motorcycle specialist'.
With its specialization strategy and focused approach, BJAUT aims to garner a
higher share of the global motorcycle market together with industry-leading
profitabi lity.
Based on 12% export volume CAGR over FY14-20, BJAUT could underperform the
two-wheeler industry by 3%, considering its absence in the fast growing scooter
industry.
BJAUT would benefit on (a) uptrading in the domestic motorcycle market, driven
by economic recovery, and (b) revival in exports, which could offset the negative
of absence in scooters. Buy with a target price of INR2,255 (14x FY16E EPS). We
prefer HMCL and TVSL to play the trend of rising scooter share.
Domestic scooter market share Domestic motorcycle market share (%)
Source: SIAM, MOSL
34December 2013
Automobiles
Companies
Hero MotoCorpCMP: INR2,065 TP: INR2,680 Buy
Valuation summary (INR b)Y/E March 2014E 2015E 2016E
Sa les 256.5 297.0 339.8
EBITDA 37.3 43.2 49.5
NP 23.3 32.3 38.2
Adj. EPS (INR) 116.8 161.7 191.5
EPS Gr. (%) (1.9) 38.4 18.5
BV/Sh. (INR) 291.2 371.5 475.9
RoE (%) 43.1 48.8 45.2
RoCE (%) 55.2 64.6 61.5
Payout (%) 64.0 49.8 45.0
Valuations
P/E (x) 17.7 12.8 10.8
P/BV (x) 7.1 5.6 4.3
EV/EBITDA (x) 10.0 8.4 7.0
Div. Yield (%) 3.1 3.4 3.6
16 December 2013
Thematic | Sector: Automobiles
BSE SENSEX S&P CNX
20,716 6,168
Shareholding pattern (%)As on Sep-13 Jun-13 Sep-12
Promoter 39.9 52.2 52.2
Dom. Inst 8.8 9.3 6.7
Foreign 42.8 30.0 32.5
Others 8.5 8.6 8.7
Riding on sharply focused, differentiated brandsFocus mainly on youth segment; plans two more launches in FY15
Despite a late entry, the differentiated positioning aimed at youth helps HMCL to
be the second-largest scooter player.
It plans to further strengthen the scooter portfolio with two new launches in FY15.
Capacity expansion being undertaken by 25% to 900,000 units by Jan 2014 to meet
rising demand.
This coupled with added volumes from entry into new export markets and potential
levers to improve margins, makes HMCL our top pick in the two-wheeler space.
Maintain Buy with a target price of ~INR2,680 (14x FY16E EPS).
Focus mainly on youth segment as against competitors focus largely on family
segment: Although HMCL was a late entrant in the scooter space, it
differentiated by positioning its products towards the youth segment, against
competitors’ focus on the family segment. While Hero Pleasure (2006 launch)
is specifically designed and positioned at women, Maestro (2012 launch) is
sharply positioned at the fast-growing yet untapped youth segment.
Two new scooter launches planned in FY15: HMCL is preparing to further
strengthen its scooter portfolio with two new launches in FY15. The new
products are expected to be unveiled at the Auto Expo 2014 (February 2014).
To meet the growing demand, company plans to increase the scooter
production capacity by 25% to 900,000 units annually by Jan 2014.
HMCL to outgrow industry with differentiated positioning and new launches:
We believe HMCL can outgrow the scooter market by its differentiated
positioning based on customer understanding, strong reach and focused
marketing.
Volumes to pick-up driven by rural momentum, new product launches and
entry in exports: HMCL’s volume momentum is expected to pick-up driven
by a) full benefit of good monsoon starts reflecting in 2HFY14, b) product
lifecycle turns favorable with ~15 launches (upgrades/refreshes) in October
2013 and new product launches in 1HFY15 and c) gradual ramp-up in exports
over next 2-3 years. We are factoring in for volume growth of 5%/13.4%/
12.8% for FY14/FY15/FY16 (2%/10%/12% for domestic motorcycle).
Multiple levers to margin expansion: HMCL’s EBITDA margins are expected
to improve from FY14 levels, driven by a) no fixed royalty beginning July
2014 (~320bp in FY14) and b) potential savings driven by cost cutting initiatives
yielding 4-5pp benefit over 30-40months.
HMCL our top pick in two-wheeler space: HMCL offers strong rural presence,
scooter market share gain and potential export ramp-up. This coupled with
multiple margin levers, we expect 28% EPS CAGR over FY14-16E (factoring in
only ~25bp accretion from cost saving initiatives). Maintain Buy with target
price of ~INR2,680 (14x FY16E EPS).
Bloomberg HMCL IN
Equity Shares (m) 199.7
M.Cap.(INRb)/(USDb) 412.4/6.6
52-Week Range (INR)2,150/1,434
1,6,12 Rel. Perf. (%) 1/21/3
Stock performance (1 year)
35December 2013
36December 2013
Automobiles
In scooters, HMCL is focused mainly on youth segment as againstcompetitors focus largely on family segment Although HMCL was a late entrant in the scooter space, it differentiated by
positioning its products towards the youth segment, against competitors’ focus
on the family segment.
Entered the scooter space in 2006 with launch of Hero Pleasure: Sensing a shift in
customer preferences, company entered the scooter space in 2006 with the launch
of Hero Pleasure (100cc engine) scooter, specifically designed and positioned at
women.
Expanded portfolio in 2012 to tap demand potential from youth segment: In 2012,
HMCL expanded its scooter portfolio with the launch of another scooter named
Maestro. With its contemporary looks and brand endorsement by bollywood actor
Ranbir Kapoor, Hero Maestro is sharply positioned at the fast-growing yet
untapped youth segment.
Two new launches planned in FY15: HMCL is preparing to further strengthen its
scooter portfolio with two new launches in FY15. The new products are expected
to be unveiled at the Auto Expo 2014 (February 2014).
Expanding capacity by 25% to meet rising demand: To meet the growing demand,
company plans to increase the scooter production capacity by 25% to 900,000
units annually by Jan 2014.
HMCL to outgrow industry with differentiated positioning and new launches: We
believe HMCL can outgrow the scooter market by its differentiated positioning
based on customer understanding, strong reach and focused marketing.
HMCL estimated to grow at 10.7% CAGR, driven by scooters and exports
FY14E FY20E CAGR (%)
Dom. M/C share (%) 51.2 46.2
Dom. M/C vols. 5,322,675 8,017,320 7.1
Dom. Scooter share (%) 19.6 24.6
Dom. Scooter vols. 687,163 2,591,065 24.8
Total dom. vols 6,009,838 10,608,384 9.9
Export vols. 259,056 950,000 24.2
Export share (%) 4.1 8.2
Total (units) 6,268,895 11,558,384 10.7
Industry (Dom + Exports) 16,617,468 33,451,907 12.4
Underperformance 1.6
Source: MOSL
37December 2013
Automobiles
HMCL dom. s cooter s hare (%)
9.7
13.3 14.4
17.4 17.219.3 20.1
FY08 FY09 FY10 FY11 FY12 FY13 1HFY14
Sharply focussed, differentiated positioning helps gain share Share of scooters on a rising trend (%)
Source: Company, MOSL
Volumes to pick-up driven by rural momentum and new product launches Biggest beneficiary of good monsoon and expected government spending in rural
markets (being an election year), given its high dependence and dominance in
rural markets (~45% of volumes vs 35% for industry).
Product life cycle turning favorable, with 15 new offerings (upgrades/refreshes)
in October 2013 and planned new product launches in 1HFY15. Hero didn’t have
any launch since Nov-12, during which HMSI launched ~5 products.
Despite no new launches in FY14YTD, it has been able to restrict market share
loss, despite new launches from HMSI, on back of strong festive/marriage season
demand reflecting its strength in rural markets.
Export foray can support overall volume growth by 2pp p.a; to contribute10% by FY20 Post exit from JV with Honda, HMCL is looking to export beyond Sri Lanka, Nepal,
Bangladesh and Colombia (markets where it was allowed to export by Honda). In
line with the ambition to become a global two-wheeler major, HMCL has made an
international foray in 2HFY13 covering Africa, Latin America and Central America.
To support international operations, HMCL has already set up assembly operations
in Sri Lanka and Kenya. It has plans to build 20 assembly facilities (including India)
to expand the company’s presence to 50 countries by the end of the decade.
In recent media interaction, Mr Pawan Munjal, MD, HMCL said, “We will be selling
in 50-plus countries by 2020 and produce 12 million motorcycles and scooters
every year. This will come from 20 assembly lines from inside and outside the
country.” Despite near term challenges, management maintains FY20 export
volume guidance of 1m units (10% of total volumes).
While the near term outlook looks challenging in various key exports markets,
the company is hopeful of better performance during 2HFY14. As of September
2013, it had presence in 10 countries, and plans to enter another 8 markets in
2HFY14 (four each in 3Q/4QFY14), taking total market coverage to ~18 (largely
Africa and Latin America). However, benefit of entry into new markets would be
only visible in FY15 onwards.
Entry in new export markets can improve overall growth by 2pp p.a. We estimate
exports of ~0.23m units in FY14, ~0.44m units in FY15 and ~0.53m units for FY16.
3 4 5 7 7 9 11 11 11
97 96 95 93 93 91 89 89 89
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E
Scooter Motorcycle
38December 2013
Automobiles
Source: MOSL, Company
Comprehensive margin improvement project can yield 400-500bp benefitover 30-40 months HMCL has initiated cost rationalization programme effective April 2013 with a
team of 300 people to improve efficiencies and improve profitability of the
company. The project would be carried out over five phases spread over 30 months
(plus ~12 months for testing).
Cost management project is expected to yield 4-5pp benefit over 30-40months,
driven by a) value engineering/re-engineering of components (~65% currently
sourced from associate companies), b) outbound logistics (driven by customized
fleets & new Gujarat plant), and c) Optimizing marketing spend.
The benefit of first phase was seen in 1HFY14 largely driven by value engineering/
re-engineering of components of couple of models (entry level motorcycle and a
scooter), some modifications on outbound logistics etc.
For 2HFY14, the company has guided savings of INR600-800m with large ticket
benefit to be visible only after 12-15 months.
Overall, management expects annual savings of INR15-17b by FY18 (400-500bp of
EBITDA margins). We estimate benefit of savings of ~INR700m (~25bp) in FY15.
232441 529
1,2003.8
6.9 7.3
10
FY14E FY15E FY16E FY20
Exports ('000 uni ts ) Exports (% of tota l volumes)
Present already in ~12 countries currently, to rise to ~18 by end-FY14
Markets Distributor Partner Products introduced/launched
Nepal NGM Introduced Hero Xtreme, Pleasure
Sri Lanka ABANS Launched HF Deluxe, HF Dawn, Splendor Pro,
Splendor NXG, Super Splendor, Glamour, Passion
Pro, Karizma ZMR, Hunk, Xtreme, Achiever
Central America Indy Motos Group Launched Hunk, Karizma, Glamour, HF Dawn,
(Guatemala, El Salvador Splendor NXG, Super Splendor, Achiever
and Honduras)
Peru MOTOCORP SAC Pleasure, Passion Pro, Glamour, Hunk, Thriller,
Karizma ZMR and Karizma R
Kenya RYCE East Africa HF Dawn
Burkina Faso
Ivory Coast
Ecuador
Source: MOSL, Company
Exports contribution targeted at ~10% of volumes by FY20
39December 2013
Automobiles
Further, royalty would stop from Jun-14, resulting in annual savings of ~INR8b or
~320bp at EBITDA level.
However, it would need to invest in a) R&D (to increase from 0.4% in FY13, 0.7% in
FY14E and 1.3-1.8% in FY15), and b) investments in export markets.
EBITDA Margins to improve meaningfully from FY15
16.9 11.8 11.0 11.3 13.9 14.69.5
24
1715
5
13 13
-3
FY10 FY11 FY12 FY13 FY14E FY15E FY16E
EBITDA Margins (%) Vol Gr (%)
Levers to profitability
Base Case FY14E FY15E FY16E FY17E
Volume Growth (%) 5.0 13.4 12.8 13.0
Adj EBITDA Margins (%) 11.3 13.9 14.6 14.8
EPS (INR) 116.8 161.7 191.5 211.4
TP (14x) 2,680 2,960
Cost cutting initiatives: Base case 100bp savings in FY16
Adj EBITDA Margins (%) 11.3 14.4 15.6 16.3
Implied cost savings (INR b) 1.5 3.4 5.7
EPS (INR) 116.8 167.1 203.9 232.1
EPS Upgrades (%) 3.4 6.4 9.8
TP (@ 16x) 3,262 3,714
Source: MOSL, Company
Hero MotoCorp our top-pick in two-wheelers; Buy HMCL offers strong rural presence, scooter market share gain and potential export
ramp-up. This coupled with multiple margin levers, we expect 28% EPS CAGR over
FY14-16E (factoring in only ~25bp accretion from cost saving initiatives).
We are factoring in for volume growth of 5%/13.4%/12.8% for FY14/FY15/FY16 (2%/
10%/12% for domestic motorcycle) for Hero MotoCorp, adj. EBITDA margins of
11.3%/13.9%/14.6% (+180bps/260bp/70bp) and EPS of ~INR117/INR162/INR191 for
FY14/FY15 (v/s consensus INR109/INR143/INR165).
The stock trades at 12.8x FY15 EPSE and ~10.8x FY16E EPS. Maintain Buy with target
price of ~INR2,680 (14x FY16E EPS).
40December 2013
Automobiles
112 119 117 162 192101 106
-10.9
10.1
18.5
38.4
18.4
-10.0
FY10 FY11 FY12 FY13 FY14E FY15E FY16E
EPS EPS Growth (%)74
289 153 117 175 195 250 332
45
75706560
105110
FY10 FY11 FY12 FY13 FY14E FY15E FY16E
Cash (INR/s h) DPS (INR/sh)
EPS to grow at 28% CAGR, after 4 years of muted EPS
Payout expected to remain high
Source: MOSL, Company
41December 2013
Automobiles
HMCL: Financials and Valuation
Income Statement (INR Million)
Y/E March 2012 2013 2014E 2015E 2016E
Volumes (‘000) 6,235 6,074 6,380 7,237 8,164
Volume Growth (%) 15.4 -2.6 5.0 13.4 12.8
Net Sales 233,681 235,827 256,544 296,979 339,835
Change (%) 21.4 0.9 8.8 15.8 14.4
EBITDA 34,078 30,991 37,291 43,244 49,500
EBITDA Margin (%) 14.6 13.1 14.5 14.6 14.6
Adj EBITDA Margin (%) 11.0 9.5 11.3 13.9 14.6
Depreciation 10,973 11,418 11,432 5,781 4,499
EBIT 23,105 19,574 25,859 37,463 45,001
Interest cost 213 119 125 125 125
Other Income 5,756 5,838 6,109 6,735 7,812
PBT 28,647 25,292 31,843 44,073 52,688
Tax 4,866 4,110 8,522 11,789 14,441
Effective Rate (%) 17.0 16.3 26.8 26.7 27.4
PAT 23,781 21,182 23,321 32,284 38,248
Change (%) 23.4 -10.9 10.1 38.4 18.5
% of Net Sales 10.2 9.0 9.1 10.9 11.3
Adj. PAT 23,781 21,182 23,321 32,284 38,248
Change (%) 18.4 -10.9 10.1 38.4 18.5
Balance Sheet (INR Million)
Y/E March 2012 2013 2014E 2015E 2016E
Share Capital 399 399 399 399 399
Reserves 42,499 49,663 57,755 73,792 94,633
Net Worth 42,898 50,062 58,154 74,192 95,032
Deferred Tax 2,083 1,324 1,324 1,324 1,324
Loans 17,143 3,022 1,900 -100 -100
Capital Employed 62,124 54,408 61,378 75,416 96,256
Application of Funds
Gross Fixed Assets 63,083 67,355 82,976 94,976 104,976
Less: Depreciation 25,228 36,645 48,077 53,858 58,357
Net Fixed Assets 37,855 30,710 34,899 41,117 46,619
Capital WIP 388 621 1,000 1,000 1,000
Investments 39,643 36,238 36,238 36,238 36,238
Curr.Assets, L & Adv. 21,003 28,848 34,050 47,548 68,989
Inventory 6,756 6,368 6,927 8,019 9,176
Sundry Debtors 2,723 6,650 7,234 8,374 9,583
Cash & Bank Balances 768 1,810 4,638 13,500 30,028
Loans & Advances 10,092 13,336 14,508 16,794 19,218
Others 664 683 743 861 985
Current Liab. & Prov. 36,765 42,008 44,809 50,488 56,590
Sundry Creditors 22,932 18,733 20,379 23,591 26,995
Other Liabilities 2,933 8,876 8,786 10,171 11,638
Provisions 10,901 14,399 15,644 16,727 17,956
Net Current Assets -15,762 -13,161 -10,759 -2,940 12,399
Application of Funds 62,124 54,408 61,378 75,416 96,256
E: MOSL Estimates
42December 2013
Automobiles
HMCL: Financials and Valuation
Ratios (INR Million)
Y/E March 2012 2013 2014E 2015E 2016E
Basic (INR)
EPS 119.1 106.1 116.8 161.7 191.5
EPS Growth (%) 18.4 -10.9 10.1 38.4 18.5
Cash EPS 132.0 120.2 132.2 190.6 214.1
Book Value per Share 214.8 250.7 291.2 371.5 475.9
DPS 45.0 60.0 65.0 70.0 75.0
Payout (Incl. Div. Tax) % 43.5 65.1 64.0 49.8 45.0
Valuation (x)
P/E 19.5 17.7 12.8 10.8
Cash P/E 17.2 15.6 10.8 9.6
EV/EBITDA 12.2 10.0 8.4 7.0
EV/Sales 1.6 1.5 1.2 1.0
Price to Book Value 8.2 7.1 5.6 4.3
Dividend Yield (%) 2.9 3.1 3.4 3.6
Profitability Ratios (%)
RoE 65.6 45.6 43.1 48.8 45.2
RoCE 49.9 43.6 55.2 64.6 61.5
Turnover Ratios
Debtors (Days) 4 11 11 11 11
Inventory (Days) 11 10 10 10 10
Creditors (Days) 36 29 29 29 29
Working Capital (Days) -25 -20 -15 -4 13
Asset Turnover (x) 3.8 4.3 4.2 3.9 3.5
Fixed Asset Turnover 5.9 6.9 7.8 7.8 7.7
Leverage Ratio
Debt/Equity (x) 0.4 0.1 0.0 0.0 0.0
Cash Flow Statement (INR Million)
Y/E March 2012 2013 2014E 2015E 2016E
Profit before Tax 28,647 25,292 31,843 44,073 52,688
Depreciation & Amort. 2,807 3,941 3,082 3,781 4,499
Direct Taxes Paid -5,827 -6,133 -8,522 -11,789 -14,441
(Inc)/Dec in Working Capital -6,906 -7,872 -696 -956 1,188
Interest/Div. Received 698 1,073
Other Items -3,290 -3,800 125 125 125
CF from Oper. Activity 16,130 12,500 25,832 35,234 44,060
(Inc)/Dec in FA+CWIP -5,034 -6,004 -7,650 -10,000 -10,000
(Pur)/Sale of Invest. 13,430 5,079 0 0 0
CF from Inv. Activity 8,396 -925 -7,650 -10,000 -10,000
Interest Paid -213 -119 -125 -125 -125
Dividends Paid -24,369 -10,444 -15,229 -16,247 -17,407
CF from Fin. Activity -24,582 -10,563 -15,354 -16,372 -17,532
Inc/(Dec) in Cash -56 1,012 2,827 8,863 16,528
Add: Beginning Balance 393 337 1,810 4,638 13,500
Closing Balance 337 1,349 4,638 13,500 30,028
E: MOSL Estimates
Bajaj AutoCMP: INR1,908 TP: INR2,255 Buy
Valuation summary (INR b)Y/E March 2014E 2015E 2016E
Sa les 210.5 241.0 281.9
EBITDA 43.5 50.3 59.4
NP 34.5 40.3 46.6
Adj. EPS (INR) 119.3 139.2 161.1
EPS Gr. (%) 13.4 16.7 15.8
BV/Sh. (INR) 333.9 403.3 488.9
RoE (%) 39.3 37.8 36.1
RoCE (%) 54.7 52.3 49.8
Payout (%) 49.0 50.1 46.9
Valuations
P/E (x) 16.0 13.7 11.8
P/BV (x) 5.7 4.7 3.9
EV/EBITDA (x) 10.4 8.5 6.8
Div. Yield (%) 2.6 3.1 3.4
16 December 2013
Thematic | Sector: Automobiles
BSE SENSEX S&P CNX
20,716 6,168
Shareholding pattern (%)As on Sep-13 Jun-13 Sep-12
Promoter 62.1 62.1 61.0
Dom. Inst 8.1 9.7 11.7
Foreign 11.1 9.7 10.5
Others 18.8 18.6 16.9
Would exports make up for absence in scooters?Asean, Brazil markets vital to sustain volume growth
Bajaj exited scooters segment in 2010 to be a global motorcycle specialist. It aims
to garner a higher market share in the global motorcycle market, together with
industry leading profitability.
Company’s strategy of specialization has worked well over the past few years, with
superior profitability versus peers, despite weak motorcycle demand environment.
However, inroads into Japan-dominated Asean and Brazilian market are imperative
to maintain healthy volume growth over the long term, considering its absence
from the scooter segment.
Despite assuming 12% export volume growth, Bajaj could underperform the industry
by 3% over FY14E-20E due to absence from scooters.
Company would benefit on a) resumption in up-trading in domestic motorcycles
driven by economic and consumer sentiment recovery and b) revival in exports,
which could offset the negative of absence in scooters segment. We prefer HMCL
and TVSL to play the trend of rising scooter share.
Bajaj exited scooters to be a global motorcycle specialist: Faced with declining
scooter sales and the need to be a global motorcycle specialist, Bajaj exited
the scooter space in 2010. With its specialization strategy, focused approach
on motorcycles coupled with KTM and Kawasaki’s association, Bajaj aims to
garner a higher share of the global motorcycle market (currently estimated
at 10%), together with industry leading profitability.
Specialization strategy lends superior profitability despite weak demand:
Bajaj’s strategy of specialization has worked well over the past few years
and has been one of the key reasons for its superior profitability versus
peers, despite weak demand environment for motorcycles.
Inroads into Japan dominated Asean and Brazilian market imperative to
maintain healthy volume growth over long term: While the current growth
in exports is driven by the under-developed and developing economies,
going forward Bajaj due to its association with KTM and Kawasaki plans to
aggressively enter the Japan dominated Asean (annual sales of 15m units)
and Brazil market (annual sales of 2m units). Asean markets are dominated
by Japan majors like Honda and Yamaha. Except Philippines, Bajaj’s previous
attempts into the Asean markets have been unsuccessful.
Company could underperform the industry due to absence from scooters:
Assuming a 12% export volume CAGR over FY14E-20E, Bajaj could
underperform the two-wheeler industry by 3% due to absence from the
fast-growing scooter industry.
Valuation & view: While valuations at 14x FY15 and 12.1x FY16 EPS are
reasonable, demand recovery along with stability in competitive intensity
would be the key driver for the stock performance. Maintain Buy with target
price of INR2,255 (14x FY16E EPS).
Bloomberg BJAUT IN
Equity Shares (m) 289.4
M.Cap.(INRb)/(USDb) 552/8.9
52-Week Range (INR)2,229/1,656
1,6,12 Rel.Perf.(%) -8/0/-16
Stock performance (1 year)
43December 2013
44December 2013
Automobiles
Source: Company, MOSL
Exports offers significant headroom to grow, but inroads into ASEAN andBrazil market key to maintain healthy growth Bajaj Auto, due to its headstart in exports and well placed global alliances (with
KTM and Kawasaki), is best placed to benefit from this huge opportunity in the
international market.
While the current growth in exports is driven by the under-developed and
developing economies, going forward Bajaj due to its association with KTM and
Kawasaki plans to aggressively enter the Japanese dominated Asean (annual sales
of 15m units) and Brazil market (annual sales of 2m units).
ASEAN and Brazil markets are dominated by Japan majors like Honda and Yamaha.
Except Philippines, Bajaj’s previous attempts into the Asean markets have been
unsuccessful. Both of its alliances with KTM (for LatAm) and Kawasaki (for ASEAN)
are expected to play major role in gaining foothold in these two markets.
12.0
17.0
22.0
27.0
32.0
37.0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 1HFY14
Dom. motorcycle s hare (%) Dom. 2W s hare (%)
Bajaj exited scooters to be a global motorcycle specialist, with focus onsuperior profitability Faced with declining scooter sales and the need to be a global motorcycle specialist,
Bajaj exited the scooter space in 2010.
With its specialization strategy, focused approach on motorcycles coupled with
KTM and Kawasaki’s association, Bajaj aims to garner a higher share of the global
motorcycle market (currently estimated at 10%), together with industry leading
profitability.
Recent comment by Rajiv Bajaj sums up their position on scooters “Great brands
are built on the foundation of sacrifices. Making more scooters doesn’t mean
making more money. We are a specialist motorcycle company. We won’t venture
out of that easily.”
Bajaj’s strategy of specialization has worked well over the past few years and has
been one of the key reasons for its superior profitability versus peers, despite
weak demand environment for motorcycles.
However, BJAUT’s market share has been impacted as scooter has grown at 2x of
motorcycle volumes over last 5 years, as a result its domestic two wheeler market
share has shrunk by 530bp since FY08 to ~17.9% in FY13 (~15.4% in 1HFY14).
Bajaj's market share in domestic two wheeler on a declining trend
45December 2013
Automobiles
Source: Company, MOSL
Could underperform the industry in the long term due to absence in scooters Assuming a 12% export volume CAGR over FY14E-20E, Bajaj could underperform
the two-wheeler industry by 3% due to absence from the fast-growing scooter
industry.
However, Bajaj could benefit from:
Up-trading in domestic motorcycles driven by economic and consumer
sentiment recovery
Revival in exports, which could offset the negative of absence from scooters
segment.
Based on our estimates, we expect BJAUT motorcycle volumes to grow at 9.1%
CAGR over FY14-20E vis-à-vis industry growth (including exports) of 12.4%. It would
be critical for BJAUT to succeed in ASEAN and Brazilian markets (not factored in
our estimates) to make-up for absence in scooters.
Bajaj Auto to underperform industry growth due to lack of presence in scooters
Bajaj FY14E FY20E CAGR (%)
Dom. M/C share (%) 22 20
Vols. 2,288,022 3,472,274 7.2
Implied dom. 2W share (%) 15.7 12.0 3.6
Export vols. 1,286,810 2,539,934 12.0
Export share (%) 36.0 42.2
Total (units) 3,574,832 6,012,208 9.1
Industry (Dom + Exports) 16,617,468 33,451,907 12.4
Underperformance 3.3
Source: MOSL
In most of its existing export markets, BJAUT is the market leader and is expected
to grow in-line with the industry with limited scope of further market share gain.
BJAUT exports are predominantly to Africa and South Asia
18% 20%
41%47%
40% 32%
1% 1%
FY12 FY13
Latin America Africa As ia & ME Europe
46December 2013
Automobiles
Well diversified product/market mix, with limited exposure to domesticexecutive level segment Well diversified product/market mix, with 2W exports & 3W volumes contributing
27% & 21% respectively to total revenues.
Exposure upto 110cc motorcycle segment, where competitive intensity is
increasing, is only ~29% of volumes.
Exports, which are scaling up rapidly, is expected to contribute ~41% to FY14
revenues, and would benefit from alliance with Kawasaki (market access) and
KTM (access to brand, technology & markets).
Bajaj’s 3W passenger business is virtual monopoly with over 85% market share in
permit segment and ~65% market share in over all passenger segment. 3W business
enjoys margins of over 30%.
Well diversified revenues, with domestic two-wheelers contributing ~42%
58 49 54 55 51 49 42 42
1211 10 9
8 88 7
1421 19 18 21 23
27 27
10 11 10 10 13 11 14 14
7 9 7 7 7 9 10 10
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E
Dom - 2W Dom - 3W Exports - 2W Exports - 3W Spare sa les
Source: Company, MOSL
Only ~15% of EBITDA at risk due to HMSI’s focus on entry/executive levelmotorcycle Considering BJAUT’s well diversified product portfolio and market mix, we
estimate ~28% EBITDA contribution from domestic motorcycle and ~14% from
domestic entry/executive segment motorcycle (as of 1HFY14).
Exports contribute ~50% to EBITDA, where as domestic premium segment and
domestic 3W would contribute ~14%/12%.
EBITDA contribution from domestic two-wheeler business at ~28% (1HFY14)
Source: Company, MOSL
Spares
12%
Exports - 3W
18%
Exports - 2W
29%
Domes tic - 3W
12%
Domestic -
Premium
16%
Domestic -
Entry/Executive
14%
47December 2013
Automobiles
Margin resilience despite various adverse developments, a reflection ofbusiness model and weaker INR BJAUT’s maintained its profitability in 18-20% range in FY13 despite a) adverse
product mix (lower exports to high margin Sri Lanka market), reduction in export
incentives (from 5.5% to 2% effective Oct-12) and marginal decline in volumes.
Margin resilience signifies the success of its twin brand strategy as well as reflects
the inherent strength of its strategy of differentiation and deeper market
segmentation.
BJAUT, being one of the largest net exporters from India, would be one of the
biggest beneficiaries of of weak INR.
We estimate exports of ~USD1.4/USD1.6b in FY14/FY15, at USD/INR rate of 60. For
every INR1 movement, BJAUT’s margins/EPS for FY15 change by 50bps/2.7%.
EBITDA margins resilient despite pressure on volumes
Source: Company, MOSL
Valuation & view We believe BJAUT’s lack of presence in scooter is made up with its well diversified
product portfolio, significant headstart in exports, well positioned global strategic
alliances, premium profitability and consistent step-up in dividends.
However, its decision to be a global motorcycle specialist and sacrificing
opportunity in scooter segment, would result in BJAUT missing out in strong growth
potential of the scooter segment.
We are downgrading our FY14/FY15 EPS estimates by ~2% each to ~INR119/INR139
to factor in for weak volume momentum.
While valuations at 13.7x FY15 and 11.8x FY16 EPS are reasonable, demand recovery
along with stability in competitive intensity would be the key driver for the stock
performance. Maintain Buy with target price of ~INR2,255 (14x FY16E EPS).
21.719.0 18.2
21.120.9
20.7
13.514.319.3
(10.5)
14.5
34.1
13.7
(2.6)(5.6)
12.5
30.0
(9.9)
FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E FY16E
EBITDA margins (%) Volume Growth (%)
48December 2013
Automobiles
BJAUT: Financials and Valuation
Income Statement (INR Million)
Y/E March 2012 2013 2014E 2015E 2016E
Volumes 4,349,560 4,237,151 4,000,094 4,500,473 5,153,493
Change (%) 13.7 -2.6 -5.6 12.5 14.5
Net Sales 195,290 199,973 210,535 240,996 281,859
Change (%) 19.1 2.4 5.3 14.5 17.0
EBITDA 37,200 36,353 43,500 50,285 59,406
Change (%) 17.3 -2.3 19.7 15.6 18.1
EBITDA Margins (%) 19.0 18.2 20.7 20.9 21.1
Depreciation 1,456 1,640 1,793 2,013 2,148
EBIT 35,744 34,713 41,707 48,272 57,258
Int. & Fin. Charges 222 5 13 10 10
Other Income 6,080 7,955 7,614 9,274 9,357
Non-recurring Exp. 1,340 0 0 0 0
PBT 40,262 42,662 49,308 57,536 66,605
Tax Rate (%) 25.4 28.7 30.0 30.0 30.0
PAT 30,041 30,436 34,515 40,276 46,623
Adj. PAT 31,069 30,436 34,515 40,276 46,623
Change (%) 18.8 (2.0) 13.4 16.7 15.8
Balance Sheet (INR Million)
Y/E March 2012 2013 2014E 2015E 2016E
Share Capital 2,894 2,894 2,894 2,894 2,894
Reserves 57,517 76,126 93,714 113,811 138,573
Net Worth 60,411 79,020 96,608 116,704 141,467
Deferred Tax 484 1,151 2,137 3,288 4,620
Loans 975 713 713 713 713
Capital Employed 61,870 80,883 99,457 120,705 146,800
Gross Fixed Assets 33,961 38,289 43,224 46,224 49,224
Less: Depreciation 19,143 20,244 22,037 24,050 26,198
Net Fixed Assets 14,817 18,044 21,187 22,174 23,026
Capital WIP 417 2,936 1,000 1,000 1,000
Investments 48,828 64,305 64,305 64,305 64,305
Current Assets 46,749 39,502 66,147 95,025 129,127
Inventory 6,785 6,363 7,853 9,016 10,571
No. of Days 16 14 17 17 17
Sundry Debtors 4,228 7,676 4,834 5,549 6,506
Cash & Bank Balances 16,538 5,589 34,125 58,956 86,837
Loans & Advances 16,227 17,741 16,314 18,035 21,146
Others 2,970 2,133 3,021 3,468 4,067
Current Liab. & Prov. 48,941 43,903 53,181 61,799 70,659
Sundry Creditors 20,031 19,796 22,960 26,360 30,906
No. of Days 52 50 58 59 59
Other Liabilities 7,161 6,682 6,042 6,937 8,133
Provisions 21,749 17,425 24,178 28,503 31,620
Net Current Assets -2,192 -4,401 12,966 33,226 58,469
No. of Days 1 1 1 1 1
Application of Funds 61,870 80,883 99,457 120,705 146,800
E: MOSL Estimates
49December 2013
Automobiles
BJAUT: Financials and Valuation
Income Statement (INR Million)
Y/E March 2012 2013 2014E 2015E 2016E
Basic (INR)
EPS 107.4 105.2 119.3 139.2 161.1
Core EPS 90.6 83.2 98.2 113.5 135.3
Cash EPS 112.4 110.8 125.5 146.1 168.5
Book Value per Share 208.8 273.1 333.9 403.3 488.9
DPS 45.0 45.0 50.0 60.0 65.0
Payout (Incl. Div. Tax) % 48.7 49.7 49.0 50.1 46.9
Valuation (x)
P/E 17.8 18.1 16.0 13.7 11.8
Cash P/E 17.0 17.2 15.2 13.1 11.3
EV/EBITDA 13.1 13.3 10.4 8.5 6.8
EV/Sales 2.5 2.4 2.2 1.8 1.4
Price to Book Value 9.1 7.0 5.7 4.7 3.9
Dividend Yield (%) 2.4 2.4 2.6 3.1 3.4
Profitability Ratios (%)
RoE 56.7 43.7 39.3 37.8 36.1
RoCE 73.0 59.8 54.7 52.3 49.8
Turnover Ratios
Debtors (Days) 8 13 8 8 8
Inventory (Days) 12 11 13 13 13
Creditors (Days) 36 34 38 38 38
Working Capital (Days) -16 -10 -17 -17 -17
Leverage Ratio
Debt/Equity (x) 0.0 0.0 0.0 0.0 0.0
Cash Flow Statement (INR Million)
Y/E March 2012 2013 2014E 2015E 2016E
OP/(Loss) before Tax 38,829 34,713 41,707 48,272 57,258
Interest/Div. Received 3,261 7,955 7,614 9,274 9,357
Depreciation & Amort. 1,456 1,640 1,793 2,013 2,148
Direct Taxes Paid -11,483 -11,560 -13,806 -16,110 -18,649
(Inc)/Dec in Working Capital 797 -8,740 11,169 4,571 2,639
CF from Oper. Activity 32,860 24,007 48,476 48,020 52,752
(Inc)/Dec in FA+CWIP -1,159 -7,386 -3,000 -3,000 -3,000
(Pur)/Sale of Invest. -6,557 -15,477 0 0 0
CF from Inv. Activity -7,716 -22,862 -3,000 -3,000 -3,000
Inc. / Dec.in Networth 0 3,307 0 0 0
Inc/(Dec) in Debt -2,001 -262 0 0 0
Interest Paid -222 -5 -13 -10 -10
Dividends Paid -13,420 -15,134 -16,927 -20,179 -21,860
CF from Fin. Activity -15,644 -12,094 -16,940 -20,189 -21,870
Inc/(Dec) in Cash 9,501 -10,950 28,536 24,831 27,881
Add: Beginning Bal. 5,565 16,538 5,589 34,125 58,956
Closing Balance 15,066 5,589 34,125 58,956 86,837
E: MOSL Estimates
TVS MotorCMP: INR54 TP: INR85 Buy
Valuation summary (INR b)Y/E March 2013 2014E 2015E
S a l e s 78.5 93.3 106.9
EBITDA 4.6 5.9 7.1
Adj. PAT 2.5 3.6 4.5
EPS (INR) 5.3 7.5 9.4
EPS Gr. (%) 39.9 40.4 25.9
BV/Sh (INR) 29.8 35.0 41.5
RoE (%) 19.2 23.1 24.6
RoCE (%) 19.3 24.3 26.9
Payout (%) 30.2 31.3 31.0
Valuations
P/E (x) 10.1 7.2 5.7
P/BV (x) 1.8 1.5 1.3
EV/EBITDA (x) 6.4 4.6 3.4
Div. Yield (%) 2.8 3.7 4.7
16 December 2013
Thematic | Sector: Automobiles
BSE SENSEX S&P CNX
20,716 6,168
Shareholding pattern (%)As on Sep-13 Jun-13 Sep-12
Promoter 57.4 57.4 57.4
Dom. Inst 18.3 18.1 18.3
Foreign 2.9 3.0 1.7
Others 21.4 21.5 22.6
50
A dark horseWell seated for scooter ride, good product pipeline; favorable risk-reward
TVSL is well positioned to benefit from the scooterization wave with its complete
scooter porfolio. Over the next 12-18 months, TVSL plans to launch multiple products
across segments to reinforce and fill gaps in product portfolio.
Operating leverage and mix to drive margins from 5.8% in FY14E to 6.7% in FY16E.
EBITDA losses in Indonesian operations continue to reduce. Any further clarity (success
of recent launch or closure of operations) could also act as a re-rating trigger.
Expect earnings CAGR of 33%, FCF of 24.8% over FY14E-16E with return ratios (RoE)
improving from 19.2% in FY14E to 24.6% in FY16E.
Initiate coverage with a Buy rating and target price of INR85. We value TVSL at 9x
FY16E standalone EPS.
TVSL is well positioned to benefit from the scooter ride: With the recent
launch of Jupiter, TVSL has the complete range of scooters, with product
across every sub-segment (women, unisex, men). Response to Jupiter has
been strong, with a waiting period of three months in non-South markets
(South launch, 60% of TVSL scooter market, expected in 4QFY14). Upcoming
launch of Scooty Zest (110cc engine, currently offering 90cc variant) will
further strengthen its positioning in the women's scooter space. Expect
scooter volumes to register a CAGR of 19.5% over FY14E-16E driven by product
actions, capacity ramp-up and robust scooter industry growth.
Strong product pipeline to reinforce, fill gaps in portfolio: Limited product
actions were the key reason for significant market share loss from 22.3% in
FY03 to 12% in 1HFY14. Unlike the past, TVSL has a strong product pipeline
and plans to launch a product every quarter, including two new executive
motorcycles and diesel three-wheeler.
Success of new launches could give disproportionate gains given wide
distribution network and low base: Due to its widespread distribution
network (second best to Hero Moto) and low base, success of any one or two
launches could drive disproportionate gains in market share and volumes.
Expected recovery in South from 4QFY14 to drive cyclical recovery in volumes:
TVSL has high exposure to South/Tamil Nadu with 56%/33% of its FY13 volumes
(v/s industry share of 31%/11%) respectively. With a favorable monsoon,
adequate water levels in reservoirs and reducing power deficit, recovery in
demand from southern market is expected to drive strong volume
improvement from 4QFY14. New launches, expected recovery in South (56%
of volumes) coupled with robust 19.5% CAGR in scooter volumes to drive
13.2% CAGR in overall volumes over FY14E-16E
Sale of non-core investments coupled with healthy cash from operations to
transform the company into net cash: Healthy cash from operations (FCF
CAGR of 24.8% over FY14E-16E) coupled with sale of non-core investments
would transform the company into net cash by FY16E from net debt of INR6.2b
Bloomberg TVS IN
Equity Shares (m) 475.1
M.Cap.(INRb)/(USDb) 25.5/0.4
52-Week Range (INR) 56/28
1, 6, 12 Rel. Per (%) 10/50/32
Stock performance (1 year)
20
30
40
50
60
De
c-12
Mar
-13
Jun
-13
Sep
-13
De
c-13
TVS Mo torSens ex - R ebas ed
TVS Motor
16 December 2013 51
in FY13. TVSL recently sold its majority stake in its energy venture thereby
reducing consolidated debt by INR2.6b.
EBITDA losses in Indonesian operations reduce: Recent launch of Skubek TVSL
Dazz (automatic transmission step-thru, 61% of the market) could improve
company's Indonesia performance. We, however, conservatively factor annual
EBITDA losses and incremental investments of INR500m over FY14E-16E (v/s
FY13 EBITDA loss of INR375m and NIL investments in FY13). Total investments
would increase from INR4.7b in FY13 to INR6.2b by FY16E.
BMW Motorrad tie-up to give additional revenue stream and technological
edge: We believe this tie-up would give TVSL an additional revenue stream in
the form of contract manufacturing for BMW Motorrad. Moreover, it would give
an aspirational value to TVSL products, particularly for its premium products.
TVSL would invest EUR20m over CY13-15 with first product expected to be
launched by CY15-end. Due to inadequate details, we have not factored the
P&L implications, though ave covered the investment requirements on a
conservative basis.
Valuation and view: Risk-reward favorable; bull case returns could be 80%
Considering well positioned scooter portfolio, robust product pipeline coupled
with possibility of disproportionate gains on new launch success, we believe
risk-reward is favorable.
Expect earnings CAGR of 33% over FY14E-16E driven by volume CAGR of 13.2%,
margin improvement of 5.8% to 6.7% by FY16 and reduction in interest cost.
Initiate coverage with a Buy rating and target price of INR85. We value TVSL at
9x FY16E standalone EPS.
Key risks: 1) Failure of new launches, 2) higher than estimated cash losses in
Indonesian operations, 3) Higher than expected investments outside standalone
business.
TVS Motor
16 December 2013 52
2,198 2,116 2,439 2,713
2,032
4.1
11.315.2
8.2
‐7.5
FY12 FY13 FY14E FY15E FY16E
To tal volumes (' 000 u ni ts) Growth (%)
Story in charts
Significant market share loss over last 10 years due to
limited product actions compared to peers
Expected recovery in South to benefit TVSL consideringits high exposure (56% of vols.) versus industry (31%)
New launches, strong scooter growth and recovery in
South to drive volume CAGR of 13.2% over FY14E-15E
Unlike past, TVSL has a robust product pipeline over the
next 12-18 months, including two new motorcycles
New launch success could give disproportionate gains
given wide network and low base
Strong 16.7% CAGR in revenues driven by volume growthof 13.2% CAGR and realization increase.
Significant market share loss over last 10 years Robust product pipeline over 12-18 month (indicative)
Expected recovery in South 4Q onwards beneficial to TVSL (%) Wide distribution to be supplemented with new launches
Expect volume CAGR of 13.2% over FY13-15E Strong 16.7% CAGR in revenues led by volume growth
Domestic 2W share (%)
22.8
20.9
18.
0
17.9
18.2
15.
9
15.2
14.5
15.
0
14.1
12.
9
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Timeline Product Comments
2QFY14 Jupiter Launch in non-South states
4QFY14 Jupiter Launch in Southern states
(60% of TVSL scooter market)
4QFY14 Scooty Zest 110cc engine as in Wego, Jupiter
4QFY14 Star City Product upgrade (all-new platform)
1QFY15 Diesel 3W Diesel segment constitute 65% of three-
wheeler market
1QFY15 Victor To share platform with
Star City upgrade model
1HFY15 4-stroke To improve fuel efficiency significantly
Moped
62,88070,650
78,524
93,289
106,858
71,41514.518.8
11.1
-1.1
13.6
44.1
FY11 FY12 FY13 FY14E FY15E FY16E
Net sales (INR m) Growth (%)
No. of dealers900
850
650700
Hero Moto TVS Motor Ba jaj Auto HMSI
13 229
1322
34
56
31
TVS Motor Ind ustry
No rth Ea st We st South
TVS Motor
16 December 2013 53
2,491 2,532 3,555 4,4761,810
25.9
(27.3)
26.3
40.439.9
FY12 FY13 FY14E FY15E FY16E
PAT (INR m) Growth (%)
19.815.7
19.324.3
26.9
23.0
15.1
19.2
23.124.6
FY12 FY13 FY14E FY15E FY16E
RoCE (%) RoE (%)
4,4403,303
5,2326,315 6,569
2,672 2,5363,278
4,756 5,015
‐1,768
‐767
‐1,953‐1,559 ‐1,554
FY12 FY13 FY14E FY15E FY16E
CFO (INR m) Cape x (INR m) FCF (INR m)
1,2893,886
‐1,318
8,181
6,170
198
48 17
480
571
FY12 FY13 FY14E FY15E FY16E
Net d ebt (INR m) In terest co st (INR m)
Story in charts
Expect margins to improve on higher volumes and better
mix
Return ratios to improve with higher revenue growth
and better profitability
High cash from operations, limited investments outside
standalone business to transform into net cash company
Higher volumes and better mix to drive margins Higher PAT growth with better margin, lower interest cost
High FCF to transform into net cash company by FY16E EBITDA losses reducing in Indonesia (INR m)
PAT growth to be higher with better margins and lower
interest cost
FCF to register a CAGR of 24.8% over FY14E-16E despite
high capex
EBITDA losses on a reducing trend in Indonesia, further
clarity (on closure of operations) a re-rating trigger
FY10 FY11 FY12 FY13
Sales volumes (units) 15,000 19,800 23,000 19,000
Growth (%) 32.0 16.2 -17.4
Revenues 683 854 1,074 1,000
EBITDA -642 -584 -490 -375
EBITDA Margin (%) -94.0 -68.4 -45.6 -37.5
PAT -1,017 -623 -1,124 -245
Cumm. Investments 2,928 3,524 4,742 4,742
% of S/A Net Worth 33.8 35.3 40.5 38.7
FY13 post USD16.7m gain on sale of surplus land
6.6
5.85.8
6.2
6.7
FY12 FY13 FY14E FY15E FY16E
EBITDA ma rgin (%)
Return ratios to improve with better profitability FCF to register a CAGR of 24.8% over FY14E-15E
TVS Motor
16 December 2013 54
Constrained R&D bandwidth, post split with Suzuki in 2001, led to inadequate
product actions in the past: During the early phase of ramping up its R&D capabilities
(post split with Suzuki in 2001), TVSL had spread itself too thin. At one point, the
R&D team was working on five projects that were diverse in terms of segments
(entry, executive and premium motorcycles), geographies (a step-through model
for the Indonesian market) and a three-wheeler. This constrained TVSL’ R&D
bandwidth which resulted in relatively lower new launches/timely upgrades of
existing successful products like Victor.
Despite launching motorcycles at par on technology with peers over the last 3-5
years, it suffered due to product specific issues: For instance, Jive (110cc auto-
clutch motorcycle) was a technologically innovative product. However, it failed to
find acceptance among customers. Similarly, TVS Flame (aggressive styling with
‘twin-spark-plug’ technology) lost its momentum due to the long drawn legal
battle with Bajaj Auto (which TVSL won in the Supreme Court in 2009).
Shift in market preference for bigger/higher engine capacity scooter impacted its
share in scooters: TVSL was the second largest player in the scooter segment, with
26.6% share in FY06. However, its product offering in scooters was entirely
dependent on Scooty brand (only 70cc variant then). With launch of Hero Pleasure
in 2006 (with a bigger 100cc engine) coupled with rising preference for family
scooter (due to universal appeal), TVSL lost significant market share in scooters.
Stretched R&D impacted TVSL’ market shareLimited launches, product specific issues, shift in market preference for biggerscooters significantly dented its market position
Constrained R&D bandwidth, post split with Suzuki in 2001, led to inadequate product
actions in the past.
Despite launching motorcycles at par on technology with peers over the last three to five
years, it suffered due to product specific issues.
Shift in market preference for bigger/higher engine capacity scooter impacted its share
in scooters.
...Primarily due to absence in the executive motorcycleSignificant decline in market share over the years… segment (constitutes over 60% of volumes)…
Source: Company, MOSL
Domestic 2W share (%)
22.
8
20.
9
18.0
17.
9
18.2
15.9
15.2
14.5
15.
0
14.1
12.
9
FY0
3
FY0
4
FY0
5
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
Dom. Motorcycle sh are (%)
6.26.7
8.7
12.9
16.415.3
5.57.0
7.9
12.912.9
19.2
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
"R&D handled too many
projects at the same
time.''- Mr KN
Radhakrishnan,
President, TVSL in an
interview with Business
Today in April 2008
TVS Motor
16 December 2013 55
TVSL’ new model introductions over 10 years much lower than competitionCompared to major competition in the two-wheeler space, the frequency of new
product launches has been relatively lower from TVSL. Moreover, as mentioned above,
due to its constrained R&D bandwidth, company was not able to sustain the momentum
of successful products like Victor due to absence of timely upgrade/refreshes.
TVSL’ launches were few and far compared to competition (motorcycles)TVS Motor Hero Moto Bajaj Auto HMSI
2013 Discover 125T, Dream Neo
100M, 100T,
KTM 390
2012 Phoenix Passion XPro, Pulsar 200NS, Dream Yuga,
Ignitor Discover 125ST, CBR150R
KTM 200
2011 Impulse Discover 125 CBR250R
2010 Jive, Max 4R
2009 Pulsar 135, CB Twister
XCD 135,
Discover 100
2008 Flame Platina 125, CBF Stunner
Discover 135
2007 Star Hunk XCD 125,
Pulsar 220,
Pulsar 200
2006 Apache Platina CB Shine
2005 CD Deluxe, Discover 110,
Achiever, Super Avenger
Splendor, Glamour
2004 Ambition KT 100, Discover CB Unicorn
2003 Centra CD Dawn, Wind 125
Karizma
2002 Dawn, Ambition
2001 Passion, Joy Eliminato r,
Pulsar, Caliber
2000 Victor, F iero
No. of models 9 16 26 8
Continuing model 3 10 11 8
Continuing model (%) 33 63 42 100
Source: MOSL, Company
…coupled with preference shift for bigger/family segment... ...impacted its share in scooters too
Source: Company, MOSL
Dom. Sco oters sha re (%)
23.8
20.519.4
25.7
15.8
21.4
14.7
21.520.9
26.6
23.7
17.9
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
43 43 4230 26 28
57 57 5870 74 72
FY09 FY10 FY11 FY12 FY13 FY14YTD
Sma l l scoo ters Large scoo ters
"Victor was a good first
attempt. It did well
initially before we
realised that durability of
certain parts was not
good enough,'' - Mr Vinay
Harne, Senior Vice-
President (R&D) in an
interview with Business
Today in April 2008.
TVS Motor
16 December 2013 56
Unlike past, TVSL has strong product pipelineWell seated for the scooter ride
Common platform strategy to support series of new launches; TVSL plans to reduce the
platforms to two or three. This would improve the time to market, product quality and
durability, coupled with better profitability.
Plans to launch a product every quarter over the next 12-18 months. This will help to
strengthen its current offerings and fill gaps in the portfolio.
Given widespread distribution network and low base, successful product actions could
drive disproportionate gains in market share and volumes .
With the recent launch of Jupiter, TVSL has the complete range of scooters, with product
across every sub-segment. Management expects scooter volumes to increase to 55,000-
60,000 units in 4QFY14 v/s ~39,000 in 2QFY14.
Common platform strategy to support series of new launches: Historically, TVSL had
multiple platforms across its two-wheeler portfolio. Now, it has adopted a common
platform strategy and plans to reduce it to two to three common platforms straddling
across segments. This would enable the company to quicken product introductions,
timely upgrades/refreshes, coupled with associated benefits of margin
improvement led by higher commonality of parts/consolidation of supplier base.
Plans to launch a product every quarter, including two executive motorcycles,
Scooty Zest (with 110cc engine) and diesel three-wheelers. Multiple product actions
will strengthen its current offerings and fill gaps in product portfolio.
TVSL's upcoming Scooty
upgrade will share the
same 110cc engine as
Wego and Jupiter.
Similarly, the new Star
City (all-new platform)
and Victor motorcycle
would share the same
platform, stated a West-
based TVSL Dealer Robust product pipeline over the next 12-18 months (Indicative list)
Timeline Product Comments
2QFY14 Jupiter Launch in non-South states
4QFY14 Jupiter Launch in Southern states (60% of TVSL scooter market)
4QFY14 Scooty Zest 110cc engine as in Wego, Jupiter
4QFY14 Star City Product upgrade (all-new platform)
1QFY15 Diesel 3W Diesel segment constitute 65% of three-wheeler market
1QFY15 Victor To share platform withStar City upgrade model
1HFY15 4-stroke Moped To improve fuel efficiency significantly
Source: Company, Industry, MOSL
New launches to fill gaps in product portfolio
BJAUT HMCL HMSI TVS
Scooter - Pleasure, Activa, Scooty,
Maestro Dio, Wego,
Aviator Jupiter*
Motorcycle
Economy Platina CD Deluxe - Star City,
Star Sports
Executive Discover (100cc, Splendor, Dream Neo, Phoenix,
125cc, 150cc) Passion, Dream Yuga, Victor**
Glamour Shine
Premium Pulsar, X-treme, Unicorn, Apache
KTM, Hunk, Trigger,
Kawasaki Karizma CBR150R,
CBR250R
Moped - - - XL Super
*Recently launched, ** Upcoming launch Sour ce: Company, MOSL
"TVS was slower in
launching the product for
the last three years,
because we invested the
time on quality. Going
forward, every quarter
we will introduce one
new product," - Venu
Srinivasan, CMD, TVSL
TVS Motor
16 December 2013 57
Given widespread distribution network and low base, success of new launches
could drive meaningful volume rise: TVSL has a wide reach with over 850 dealers,
second best only to market leader Hero MotoCorp (~900 dealers) and much ahead
of Bajaj (~650 dealers) and HMSI (~700 dealers). Success of new launches could
give huge fillip to market share and volumes considering low base.
Recent launch of Jupiter scooter completes the scooter portfolio: To strengthen its
presence in the executive motorcycle segment, TVSL had launched Phoenix 125cc
motorcycle in September 2012. With recent Jupiter (110cc scooter) launch, TVSL has
a complete scooter portfolio. The scooter has been launched in non-South market
and has received strong response with waiting of thee months. Launch in South is
expected in January 2014 (coinciding with Pongal festival). Management expects
scooter volumes to increase to 55-60,000 units in 4QFY14 v/s ~39,000 in 2QFY14.
Source: Company, MOSL
TVS: Segme nt-wise moto rcycle marke t sh are (%)
20.1
1.6
7.3
Eco nomy Executive Premium
Segmen t-wis e motorcycle sh are o f indus try
vols (%)
18 19
63
Econ omy Executive Premiu m
TVSL plans to launch two executive motorcycles; recent Executive segment is the largest in motorcycleslaunch of Phoenix motorcycle has been received well with over 60% volume share
Launch of new Scooty Zest (with 110cc engine) to strengthenpresence in the small segment, while production ramp-up in TVSL network second best only to market leaderJupiter to boost market share in bigger/family segment Hero Moto
Source: Company, MOSL
TVS: Segment-wise scooter market share (%)26.5
7.29.73
Apr-Aug 2013
(b efore Jupi ter)
Se pt-Oct (after
Jup i ter)
Smal l Bigger/Fami ly Se gment
No. of dealers900
850
650700
He ro Moto TVS Mo to r Baja j Auto HMSI
Victor re-launch should
strengthen TVSL's
presence in executive
segment i.e in ~45% of
the domestic two-
wheeler market
TVS Motor
16 December 2013 58
Source: Company, MOSL
With the recent launch of Jupiter, TVSL has the complete range of scooters, with product acrossevery sub-segment (women, unisex, men)
TVS Scooty aimed at female drivers TVS Wego positioned as TVS Jupiter targeted for male(currently 70cc, 110cc engine variant unisex product (110cc engine) riders (110cc engine)launch in Jan-14)
TVS Motor
16 December 2013 59
Expected recovery in South to drive volumesTVSL derived 56%/33% of its FY13 volumes from South/Tamil Nadu
Consumer sentiments in southern region, particularly Tamil Nadu, have been weak over
the last couple of years due to drought and major power shortage which impacted
industrial activity and small-scale industries. This had impacted TVSL’ volumes, particularly
its mopeds.
Going forward, income levels and consequent sentiments (mainly in rural belts) are
expected to improve with favorable monsoon, adequate water levels in reservoirs and
improvement in power availability.
TVSL has a high exposure to the southern region with 56% of its FY13 volumes v/s
industry exposure of 31%. Expected recovery in demand in southern region from 4QFY14
onwards would benefit TVSL given its high exposure
Southern region, particularly Tamil Nadu, has performed relatively weak:
Consumer sentiments in the southern region, particularly Tamil Nadu, have been
weak over the last couple of years due to a drought and major power shortage
which impacted industrial activity and small-scale industries. Given its high
exposure to the southern region, TVSL’s volumes, mainly moped sales, were
impacted.
Source: Industry, MOSL
TVSL derived 56% of its FY13 volumes from south (%) Among south, exposure to Tamil Nadu is the highest (%)
Tamil Nadu provide almost half of moped volumes… ...weak sentiments in Tamil Nadu impacted moped sales
Source: Industry, Company , MOSL
FY13 State-wise sales break-up (%)
Tami l Nadu,
47
Karnataka, 9
Andhra
Pradesh,
15
UP, 7
Others , 21
Growth YoY (%)
‐6.7
10.2
18.7 19.4
6.2
30.823.0
11.8
0.8
‐9.7
‐0.8 4.9
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY1
4‐Y
TD
13 229
1322
34
56
31
TVS Motor Industry
North Eas t West South
TVS Motor
16 December 2013 60
Favorable monsoon and better power availability to drive recovery 4QFY14
onwards: Going forward, income levels and consequent sentiments (mainly in
rural belts) are expected to improve with favorable monsoon, adequate water
levels in reservoirs and improvement in power availabi lity.
Expected recovery in South to drive volumes, given high exposure: TVSL has a
high exposure to the southern region with 56% of its FY13 volumes v/s industry
exposure of 31%. In the southern region, exposure to Tamil Nadu, particularly for
scooters and mopeds at 33% and 47% respectively, is higher.
Product actions and recovery in South to drive 13% CAGR in Expect scooters to grow at strong rate driven by ramp-uptwo-wheeler volumes over FY14E-15E of Jupiter coupled with new Scooty Zest launch
2,158 2,331 2,5901,983
2,028
11.114.9
2.3
-8.1
8.3
FY12 FY13 FY14E FY15E FY16E
Two-wheele rs (' 000 u ni ts) Growth (%)
0.8
17.1
11.8
-11
.1
0.8
7.0 9.0
-5.9
13.7
24.
5
10.0
11.
5
14.
8
8.0
-16.
5
Mo torcycles Scooters Mop eds
FY12 FY13 FY14E FY15E FY16E
Favorable monsoon across regions Power deficit trend improves in southern region (%)
Source: Industry, India Meteorlogical department, CEA
0
5
10
15
20
Apr
-12
Jun-
12
Au
g-1
2
Oct
-12
De
c-1
2
Feb-
13
Apr
-13
Jun-
13
Au
g-1
3
South Al l India
Source: Company, MOSL
TVS Motor
16 December 2013 61
Three-wheeler export opportunity is immense to developing/under-developed
economies: Our industry interactions indicate that the three-wheeler export
opportunity is immense, with estimated annual market size of 0.9m units. Export
markets for three-wheelers primarily include developing and under-developed
countries like Bangladesh, Sri Lanka, African countries and Latin American countries.
Demand from Africa drives robust growth in exports: TVSL’ three-wheeler export
volumes have increased by over 150% YTD FY14, driven primarily by African markets
(~75% of its volumes). Increase in export volumes has been primarily through a
combination of entry into new markets, offering competitive pricing together with a
better product.
Launch of diesel three-wheeler to drive recovery in domestic volumes: Diesel three-
wheeler segment constitutes a bigger chunk in the domestic three-wheeler market,
with 65% share. Of this, ~15% of the market consists of smaller diesel three-wheelers.
TVSL plans to enter this segment in 4QFY14/1QFY15. Company has already started selling
diesel three-wheelers in Kerala on a trial basis. Our industry interactions indicate that
TVSL plans to double sales in the domestic market, with the availability of diesel variants.
Immense export opportunity for three-wheelersLaunch of diesel variants and new permits to drive domestic recovery
Our industry interactions indicate that the three-wheeler export opportunity is immense,
with estimated annual market size of 0.9m units (Global market size of 1.5m units).
TVSL’ three-wheeler export volumes have increased by over 150% YTD FY14 driven
primarily by strong performance of the African markets (~75% of its volumes).
Launch of diesel variants coupled with new permits issuance to drive recovery in domestic
three wheeler volumes.
TVSL plans to increase capacity by 25% to 10,000 units per month to accommodate high
export growth and diesel variants launch in domestic market.
Expect three-wheeler volumes to register a CAGR of 18.5% over FY14E-16E (1HFY14
growth of 150%) driven by continued growth in exports and recovery in domestic volumes.
Three-wheeler is a high margin business. Bajaj Auto is estimated to have over 30% EBITDA
in three-wheelers. Even a smaller player like Atul Auto enjoys double digit margin (FY13
EBITDA margin of 11.6%) and over 30% return ratios.
Export markets for three-
wheelers primarily
include developing and
under-developed
countries like Africa
Source: MOSL
Diesel segment constitutes 65% of the 3-wheeler market Strong export growth, diesel variant to drive domestic recovery
Diese l
s egmen t,
65
Petrol/
al te rnate
fu el
se gment,
35
6
43 34
150
(34) (33)
FY12 FY13 1HFY14
Dome stic gr. (%) Exports gr. (%)
TVS Motor
16 December 2013 62
Source: MOSL
Expect 3Ws to register a CAGR of 18.5% over FY14E-15E Share of high margin 3Ws to increase
49,190
87,895
108,050 123,325
39,792
-0.2
23.6
78.7
22.914.1
FY12 FY13 FY14E FY15E FY16E
3W volumes (uni ts ) Gro wth (%)
Diesel three-wheeler
segment constitutes a
bigger chunk in the
domestic three-wheeler
market, with 65% share
Capacity expansion to 10,000 units: Company is constrained by capacity, which currently
stands at 8,000 units per month. It plans to increase capacity to 10,000 units a month.
This would accommodate higher demand from exports coupled with ramp-up in
domestic volumes, driven by launch of diesel variants.
Three-wheeler is a high margin business: Bajaj Auto (which is also largely into petrol/
alternate fuel segment) is estimated to achieve over 30% EBITDA on its three-wheeler
sales. A relatively smaller player like Atul Auto (FY13 annual sales of 32,000 units) also
enjoys double digit margin (FY13 EBITDA margin of 11.6%) and over 30% return ratios.
1.8 2.1
3.6 3.8 3.94.6
6.3
9.29.9 10.2
FY12 FY13 FY14E FY15E FY16E
Vo lume s (%) Revenu es (%)
TVS Motor
16 December 2013 63
Operating leverage and better mix to drive marginsUpside risk exist with enhanced competitive position and better pricing power
Weak brand acceptance (due to product failure earlier) and consequent low volumes
resulted in significantly higher marketing spends and lower margins compared to peers.
Operating leverage benefits coupled with better gross margins on improved mix (higher
three-wheeler share) to drive margin improvement from 5.8% in FY13 to 6.7% in FY16E.
EBITDA CAGR of 24.8% (FY14E-16E) on revenue CAGR of 16.7% led by margin increase.
Success of new launches could drive considerable improvement in brand acceptance,
competitive positioning and volumes due to wide distribution network and low base.
Any improvement in competitive positioning and consequent narrowing of pricing gap
versus peers provides significant upside risk to our margins (currently not factored in).
Weak brand acceptance and consequent low volumes resulting in significantly higher
marketing spends: Over the years, due to lack of successful product introductions,
TVSL brands (mainly in urban markets) have been hugely impacted. This resulted in
heavy marketing spends to drive volumes and thus is a constant strain on profitability.
…high marketing spends the key reason, coupled with highDespite similar gross margins, EBITDA margin lower than peers… employee cost and low volumes
Source: Company, MOSL
Success of certain model introductions could drive a turnaround: The success of certain
model introductions could drive significant improvement in brand acceptance,
competitive positioning and consequent volumes due to TVSL’ low volume base and
wide distribution network.
Operating leverage and better mix to drive margins: Higher volumes coupled with
better gross margins on improved mix (higher three-wheeler share) to drive margin
rise from 5.8% in FY13 to 6.7% in FY16.
Any improvement in competitive positioning provides upside risk to margins: TVSL
has been generally aggressive in pricing the products due to its weak brand equity.
For example, the recently-launched product Jupiter (110cc scooter) has been priced
at ~10% to market leader Honda Activa, despite offering higher features. Improvement
in competitive positioning could lead to narrowing of pricing gap versus peers and
key driver for margin improvement (current not factored in our estimates).
TVSL’ recently-launched
product Jupiter (110cc
scooter) has been priced
at ~10% to market leader
Honda Activa despite
offering higher features.
27.926.2
28.0
5.8
9.5
18.2
TVS He ro Baja j
FY13 gro ss margins (%) FY13 EBITDA margins (%)
1.3
5.8
1.6
6.5
3.74.6
0.5
3.5
0.9 2.0
3.9
2.20.6
3.1
1.3 1.32.4
1.4
Pow
er,
Fue
l
Emp.
exp
Oth
er
ma
nufa
ctur
ing
exp
Ma
rket
ing
exp.
Ad
min
exp
.
Mis
c. e
xp.
TVS Mo tor Hero Moto Bajaj Auto
TVS Motor
16 December 2013 64
Total volumes to register CAGR of 13.2% Product mix to improve with higher 3W, lower mopeds
Source: Company, MOSL
Source: Company, MOSL
2,198 2,116 2,439 2,713
2,032
4.1
11.315.2
8.2
-7.5
FY12 FY13 FY14E FY15E FY16E
Total vo lume s (' 000 u ni ts) Growth (%)
40.1 38.6 37.4 36.9
20.7 23.3 25.0 25.6
22.2 18.0 16.7
6.3 9.2 9.9 10.210.6 10.9 10.5 10.6
17.2
FY13 FY14E FY15E FY16E
Moto rcycles Scoote rs Mop edsThre e-wheelers Spa re pa rts
6.6
5.8 5.8
6.2
6.7
FY12 FY13 FY14E FY15E FY16E
EB ITDA margin (%)
Higher volumes and better mix to drive EBITDA margin increase from 5.8% to 6.7% in FY16E
TVS Motor
16 December 2013 65
EBITDA losses reduce in Indonesia operationsFurther clarity (on closure of operations) could also act as a re-rating trigger
Indonesia is the third largest two-wheeler market globally. Considering the size and
growth opportunity, TVSL entered Indonesia in FY07.
Unlike India, Indonesian market is largely dominated by step-thrus. Moreover, competitive
intensity is high, with over 90% share held by Honda and Yamaha combined.
Given dominance of Japanese majors coupled with significant market shift towards Skubek
segment in a few years time, TVSL continues to make cash losses.
Entry into Skubek segment in FY14 (constituting 61% of market) is expected to improve
performance. Management expects cash break-even by FY15-end.
However, we conservatively estimate annual cash losses and incremental investments of
INR500m over FY14E-15E.
TVSL entered Indonesia in FY07 eyeing size, growth opportunityIndonesia is the third-largest two-wheeler market globally, after China and India.
Considering the size and healthy growth potential, company entered Indonesia in
FY07 through its wholly-owned subsidiary PT TVS Motor Company Indonesia, with a
manufacturing facility and an annual capacity of 300,000 units.
Investments in Indonesia are held indirectly through TVS Motor Company (Europe)
B.V. and TVS Motor (Singapore) Pte Ltd.
Indonesian market dominated by step-thrus; over 90% of market shareheld by Honda and YamahaUnlike the Indian market where motorcycle sales form a sizeable part, the Indonesian
market is largely dominated by step-thrus. Moreover, the Indonesian market is
dominated by Japanese players, Honda and Yamaha, holding over 90% of the market
share.
TVSL’ losses continue due to Japanese majors, preference for SkubeksCompany’s addressable market declined sharply (to 27% from over 90% in FY04) as
demand shifted to automatic transmission step-thrus called Skubeks, which provided
convenience and comfort comparable to the mileage and performance of geared
step-thrus called Bebeks. Until recently, TVSL was present only in the Bebek segment.
Skubek as a category increased to 61% in FY13 from almost nil in FY04.
Moreover, given the dominance of Japanese majors along with the significant market
shift for Skubeks in a few years time, TVSL continues to make losses in the Indonesian
operations, thereby requiring continuous investments to fund the cash losses.
Financials: Indoensia operations (INR m)FY10 FY11 FY12 FY13
Sales volumes (units) 15,000 19,800 23,000 19,000
Growth (%) 32.0 16.2 -17.4
Revenues 683 854 1,074 1,000
EBITDA -642 -584 -490 -375
EBITDA Margin (%) -94.0 -68.4 -45.6 -37.5
PAT -1,017 -623 -1,124 -245
Cumm. Investments 2,928 3,524 4,742 4,742
% of S/A Net Worth 33.8 35.3 40.5 38.7
FY13 PAT post USD16.7m gain on sale of surplus land Source: Company, MOSL
Indonesia is the third-
largest two-wheeler
market globally, after
China and India
Unlike the Indian market
where motorcycle sales
form a sizeable part, the
Indonesian market is
largely dominated by
step-thrus
TVS Motor
16 December 2013 66
Management guided cash break-even by FY15-end; cash losses reduce Average realizations in the Indonesian market are high at USD1,000/unit
(compared to USD700/unit in India).
Considering the high realizations and consequent high gross margins, as per
management, the Indonesian operations would break even with monthly sales of
5,000 units (v/s current monthly sales of ~2,000 units).
TVSL introduced a new Skubek TVS Dazz (automatic transmission step-thru) in
FY14. Hence, it expects monthly volumes and financial performance to improve.
Also, it plans to ramp up the dealer network to 150 by FY14-end (from 100 in FY13)
and tie up with multi-finance companies to leverage retail finance and increase
sales during FY14.
TVSL plans to use the Indonesian base to export to Asean countries.
Indonesian operations’ EBITDA losses reduce EBITDA losses in the Indonesian operations have been on a reducing trend, with
cost control measures.
For FY13, TVSL Indonesia delivered a better performance with EBITDA loss reducing
to INR375m v/s INR490m in FY12, despite volumes declining by ~17%.
However, profits were boosted by a surplus land sale for USD23.4m, which led to
a profit of USD16.9m.
Factor cash losses, investment of INR500m annually over FY14E-16E Due to the dominance of Japanese majors and weak historical performance, we
factor annual cash losses and investments of INR500m over FY14E-16E.
Any further clarity (success of recent launch or closure of operations) could also
act as a re-rating trigger.
FY13 performance was
boosted by a surplus land
sale for USD23.4m, which
led to a one-time profit
of USD16.9m
TVS Motor
16 December 2013 67
BMW Motorrad tie-up: Largely a contract manufacturingopportunityIn April 2013, TVS Motor and BMW Motorrad signed a long-term technology co-
operation agreement to develop and produce a new series of sub 500cc
motorcyclesto be sold through their own distribution network and under their own
brand.
In April 2013, TVS Motor and BMW Motorrad signed a long-term technology co-
operation agreement to develop and produce a new series of sub 500cc motorcycles
to be sold through their own distribution network and under their own brand.
Broad contours of the deal:
Jointly develop sub 500cc premium motorcycles. Each vehicle would have two
derivatives for both OEMs, one for TVSL and other for BMW.
BMW’s variant is expected to have premium technology and features, whi le
TVSL’s counterpart is expected to cater to the affordable segment positioned
above the current offering, Apache .
Individual products would be sold through their own distribution channels in
India and across the globe and under their respective brand.
Manufacturing would be done entirely by TVSL.
The first product would hit the market in 2015-end.
TVSL would invest EUR20m over CY13-15. BMW would also invest an undisclosed
sum for joint development.
Rationale for the tie-up
For TVS Motor For BMW Motorrad
Outsourcing/contract manufacturing Gain from TVSL's cost effective manufacturing
opportunity giving additional revenue operations to expand operations in fast growing
stream Asian and South American markets. Global market
size for 250-750cc is 800,000 units.
Access to superior high-end technology Access to Indian market - world's second
largest and growing market
BMW association could improve its Shared investments
market position and greater brand
acceptance in urban markets
Source: Company, MOSL
Similarity in TVS-BMW collaboration vis-a-vis Bajaj-KTM association
Product Intention to jointly product 250-500cc motorcycles for Indian and
global markets
Technology Both foreign partners brings in the technology and aspirations to the
a l l i a n c e
Cost arbitrage Cost effective operations of the Indian partner
Source: MOSL
TVS Motor
16 December 2013 68
Our view Similar to Bajaj-KTM alliance, we believe this tie-up would give TVSL an
additional revenue stream in the form of contract manufacturing for BMW
Motorrad.
However, unlike the Bajaj-KTM alliance, we are apprehensive if the tie-up
involves joint product development. In its absence, TVSL may not be able to
gain significantly from the pact.
Due to inadequate details, we have not factored the P&L implications, though
have covered the investment requirements on a conservative basis.
Difference in TVS-BMW collaboration and Bajaj-KTM associationBajaj-KTM TVS-BMW
Brand gap Narrow gap between Bajaj-KTM Wider gap between TVS-BMW
brand i.e. Bajaj highest offering is brand i.e. TVSL biggest offering is
200cc motorcycle, while KTM's of 180cc, while BMW's lowest
lowest offering starts from 50cc offering is of 650cc
to to over 1000cc
Current volumes Bajaj sells almost a million TVSL relatively small player with
annual premium motorcycle annual premium motorcycles sale of
180k units
Ownership Bajaj has 48% equity stake Only a tie-up with no equity
interest in KTM interest
Source: MOSL
TVS Motor
16 December 2013 69
Non-core investments remains a concernTVSL recently divested majority stake in its non-core energy venture
Investments in non-core businesses constitute 37% of FY13 standalone net worth and
have been a cause of concern. TVSL made these investments to leverage the TVS brand
name in other business opportunities.
TVS divested its majority stake in its energy venture in 2QFY14. Also, company has guided
for no major incremental investments in its housing business.
TVSL though plans to scale up its captive financing arm to support the two-wheeler
business and hence guided for further equity investment in this business.
We have factored further annual investments of INR500m largely in its captive financing
arm over FY14E-16E.
Key subsidiaries'performance(INR m) FY12 FY13
Sundaram Auto 51 136
TVS Energy -69 42
TVS Wind Energy -9 29
TVS Wind Power -2 9
TVS Europe 24 -892
TVS Singapore 0 -1
TVS Indonesia -1,124 -245
Sundaram 0 -5
Business Dev.
Total Losses -1,128 -926
Source: Company, MOSL
Investments into various business constitute 62% of standalone networth (INR m)
Unqoted Investments Holding (%) Relationship FY12 FY13 FY14E FY15E FY16E
Indonesian operations
TVS Europe 100 Subsidiary 1,265 1,265 1,265 1,265 1,265
Less: Write down (916) (916) (916) (916)
TVS Singapore 100 Subsidiary 2,012 2,012 2,012 2,012 2,012
TVS Indonesia (Pref. shares) 100 Subsidiary 1,465 1,465 1,965 2,465 2,965
Total (net of write down) 4,742 3,826 4,326 4,826 5,326
Low cost housing business
TVS Housing 100 Subsidiary 1 1 1 1 1
Emerald Haven Realthy 48.8 Associate 400 400 400 400 400
Total 401 401 401 401 401
Vehicle Finance arm (engaged in two-wheelers financing , also present in used cars and tractor financing)
TVS Motor Services 19 Subsidiary 4 4 4 4 4
TVS Motor Services (Pref. shares) Subsidiary 2,460 2,710 3,210 3,710 4,210
Total 2,464 2,714 3,214 3,714 4,214
Auto Component (business of supplying Interior and exterior plastic parts and rubber products for automobiles)
Sundaram Auto 100 Subsidiary 609 609 609 609 609
TVS Energy 768 768 33 33 33
Others 32 32 32 32 32
Total investments 9,015 8,349 8,614 9,614 10,614
Incremental investments 265 1,000 1,000
S/A Net Worth 11,696 12,247 14,172 16,615 19,479
% of S/A Net Worth 77 68 61 58 54
% of S/A Net Worth 37 37 30 29 27
(Ex-Indonesia, Ex-Engery venture)
Source: Company, MOSL
TVS Motor
16 December 2013 70
Initiate at Buy with a target price of INR85Risk-reward favorable; expect earnings CAGR of 33% over FY14E-16E
TVSL is well positioned to benefit from the scooterization wave with its complete scooter
porfolio. Over the next 12-18 months, TVSL plans to launch multiple products across
segments to reinforce and fill gaps in product portfolio.
Operating leverage and better mix to drive margins from 5.8% in FY14E to 6.7% in FY16E.
EBITDA losses in Indonesian operations continue to reduce. Any further clarity (success of
recent launch or closure of operations) could also act as a re-rating trigger.
Expect earnings CAGR of 33% over FY14E-16E with return ratios (RoE) improving from 19.2%
in FY14E to 24.6% in FY16E.
Healthy cash from operations (FCF CAGR of 24.8% over FY14E-16E) coulpled with sale of
non-core investments would transform into net cash by FY16E from net debt of INR6.2b in
FY13.
Initiate coverage with a Buy rating and target price of INR85. We value TVSL at 9x FY16E
standalone EPS.
Key risks: 1) Failure of new launches, 2) higher than estimated cash losses in Indonesian
operations, 3) Higher than expected investments in outside standalone business.
TVS Motor PE band TVS Motor PB band
Source: Bloomberg, MOSL
8.19.5
16.8
2.52
7
12
17
22
Jan-
09
Jul-
09
Jan-
10
Jul-
10
Dec
-10
Jul-
11
Dec
-11
Jun-
12
Dec
-12
Jun-
13
Dec
-13
P/E (x) Avg(x) Pea k(x) M i n(x)
1.6
3. 5
0. 2
0.0
1.0
2.0
3.0
4.0
Jan-
09
Aug-
09
Mar
-10
Sep-
10
Apr
-11
Oct
-11
May
-12
Nov
-12
Jun-
13
Dec-
13
P /B (x) Avg (x) Pe a k(x) Mi n(x)
0
20
40
60
80
Jan
-09
Jul-
09
Jan
-10
Jul-
10
Jan
-11
Jul-
11
Dec
-11
Jun
-12
Dec
-12
Jun
-13
Dec
-13
Di scou nt (%) Average (%)
Source: Bloomberg, MOSL
Average discount to Hero Moto has been 33% over the last five years
TVS Motor
16 December 2013 71
Key assumptionsFY13 FY14E FY15E FY16E
Total volumes (units) 2,032,240 2,116,156 2,438,707 2,713,269
Growth (%) -7.5 4.1 15.2 11.3
Motorcycle (units) 749,429 801,800 911,661 1,016,481
Growth (%) -11.1 7.0 13.7 11.5
Scooter (units) 441,552 481,312 599,066 687,817
Growth (%) -16.5 9.0 24.5 14.8
Moped (units) 792,069 745,151 819,930 885,646
Growth (%) 0.8 -5.9 10.0 8.0
Three-wheelers (units) 49,190 87,895 108,050 123,325
Growth (%) 23.6 78.7 22.9 14.1
Domestic (units) 1,787,007 1,807,116 2,086,736 2,321,364
Growth (%) -6.5 1.1 15.5 11.2
Export (units) 245,233 309,063 351,994 391,925
Growth (%) -14.8 26.0 13.9 11.3
Net realization (INR/unit) 33,749 36,531 37,564 38,629
Growth (%) 5.9 8.2 2.8 2.8
Net Sales (INR m) 70,650 78,524 93,289 106,858
Growth (%) -1.1 11.1 18.8 14.5
Source: Company, MOSL
TVS Motor
16 December 2013 72
Financials and Valuation
Standalone - Income Statement (INR Billion)
Y/E March 2012 2013 2014E 2015E 2016E
Net Sales 71,415 70,650 78,524 93,289 106,858
Total Expenditure 66,722 66,560 73,930 87,412 99,731
% of Sales 93.4 94.2 94.2 93.7 93.3
EBITDA 4,694 4,090 4,594 5,877 7,127
Margin (%) 6.6 5.8 5.8 6.3 6.7
Depreciation 1,175 1,304 1,291 1,388 1,470
EBIT 3,518 2,786 3,302 4,490 5,657
Int. and Finance Charges 571 480 198 48 17
Other Income - Rec. 217 246 271 298 328
PBT bef. EO Exp. 3,165 2,552 3,375 4,740 5,968
EO Expense/(Income) 0 916 -303 0 0
PBT after EO Exp. 3,165 1,636 3,678 4,740 5,968
Current Tax 655 520 809 1,043 1,313
Deferred Tax 19 -44 110 142 179
Tax Rate (%) 21.3 29.1 25.0 25.0 25.0
Reported PAT 2,491 1,160 2,759 3,555 4,476
PAT Adj for EO items 2,491 1,810 2,532 3,555 4,476
Change (%) 26.3 -27.3 39.9 40.4 25.9
Standalone - Balance Sheet (INR Million)
Y/E March 2012 2013 2014E 2015E 2016E
Equity Share Capital 475 475 475 475 475
Total Reserves 11,221 11,772 13,696 16,140 19,226
Net Worth 11,696 12,247 14,172 16,615 19,701
Deferred Liabilities 976 931 931 931 931
Total Loans 8,311 6,345 4,345 4,320 3,820
Capital Employed 20,982 19,523 19,448 21,866 24,452
Gross Block 21,545 22,479 24,479 25,979 27,479
Less: Accum. Deprn. 11,289 12,365 13,656 15,043 16,514
Net Fixed Assets 10,256 10,115 10,823 10,936 10,966
Capital WIP 525 361 314 373 427
Total Investments 9,309 8,688 8,953 9,953 10,953
Curr. Assets, Loans&Adv. 11,055 12,029 12,768 16,673 20,663
Inventory 5,846 5,097 5,357 6,183 7,082
Account Receivables 2,080 3,005 3,012 3,323 4,099
Cash and Bank Balance 130 175 459 3,031 5,138
Loans and Advances 2,998 3,752 3,940 4,137 4,344
Curr. Liability & Prov. 10,163 11,670 13,412 16,070 18,558
Account Payables 9,585 11,136 12,207 14,503 16,612
Provisions 577 534 1,204 1,567 1,945
Net Current Assets 892 359 -643 604 2,105
Appl. of Funds 20,982 19,523 19,448 21,866 24,452
E: MOSL Estimates
TVS Motor
16 December 2013 73
Financials and Valuation
Ratios
Y/E March 2012 2013 2014E 2015E 2016E
Basic (INR)
EPS 5.2 3.8 5.3 7.5 9.4
Cash EPS 7.7 6.6 8.0 10.4 12.5
BV/Share 24.6 25.8 29.8 35.0 41.5
DPS 1.3 1.2 1.5 2.0 2.5
Payout (%) 28.8 56.5 30.2 31.3 31.0
Valuation (x) *
P/E 10.3 14.1 10.1 7.2 5.7
Cash P/E 7.0 8.2 6.7 5.2 4.3
P/BV 2.2 2.1 1.8 1.5 1.3
EV/Sales 0.5 0.4 0.4 0.3 0.2
EV/EBITDA 7.2 7.8 6.4 4.6 3.4
Dividend Yield (%) 2.4 2.2 2.8 3.7 4.7
Return Ratios (%)
RoE 23.0 15.1 19.2 23.1 24.6
RoCE 19.8 15.7 19.3 24.3 26.9
Working Capital Ratios
Asset Turnover (x) 3.4 3.6 4.0 4.3 4.4
Inventory (Days) 29.9 26.3 24.9 24.2 24.2
Debtor (Days) 10 14 13 12 13
Leverage Ratio (x)
Current Ratio 1.1 1.0 1.0 1.0 1.1
Debt/Equity 0.7 0.5 0.3 0.3 0.2
* Adjusted for treasury stocks
Standalone - Cash Flow Statement (INR Million)
Y/E March 2012 2013 2014E 2015E 2016E
NP/(Loss) bef. Tax & EO Items 3,165 1,628 3,375 4,740 5,968
Depreciation 942 1,076 1,291 1,388 1,470
Interest & Finance Charges 408 327 198 48 17
Direct Taxes Paid 700 527 920 1,185 1,492
(Inc)/Dec in WC 626 800 1,287 1,325 606
CF from Operations 4,440 3,303 5,232 6,315 6,569
Others -31 878 -271 -298 -328
CF from Operating incl EO 4,409 4,181 4,961 6,017 6,241
(inc)/dec in FA -1,768 -767 -1,953 -1,559 -1,554
(Pur)/Sale of Investments -2,699 -295 -265 -1,000 -1,000
Others 658 77 271 298 328
CF from Investments -3,809 -985 -1,947 -2,261 -2,226
(Inc)/Dec in Debt -778 -276 -2,000 -25 -500
Interest Paid -571 -517 -198 -48 -17
Dividend Paid -659 -715 -834 -1,112 -1,390
Others 2,269 564 303 0 0
CF from Fin. Activity 261 -945 -2,729 -1,184 -1,907
Inc/Dec of Cash 861 2,251 285 2,572 2,107
Add: Beginning Balance -731 -2,077 175 459 3,031
Closing Balance 130 175 459 3,031 5,138
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Disclosure of Interest Statement Companies where there is interest1. Analyst ownership of the stock None2. Group/Directors ownership of the stock Hero MotoCorp3. Broking relationship with company covered None4. Investment Banking relationship with company covered None
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